It is expected that the chancellor will announce in the Budget on the 16th March 2016 a flat rate tax relief on pension contributions. This has come under a lot of scrutiny from many financial professionals but is seen as the lesser of two evils when considered alongside a ‘Pension ISA’. The chancellor is considering a flat rate of between 20% and 33% which if set at 25% could have a major impact on those already in pension schemes/those planning their retirement investments.
For those who have workplace pensions with defined fixed pension contributions this could reduce their monthly take home pay.
As an example an individual on £60,000 salary, paying 5% into a defined fixed pension contribution would be paying in £3,000 to their pension. Under current legislation a higher rate tax payer would pay in £1,800 and the government would top up the contributions with £1,200 (tax refund into scheme).
However, if a flat rate of 25% was introduced using the same scenario above, the individual would be required to pay in £2,250 with the government only topping up the contributions with £750. This would leave the employee having to pay in the additional £450, which would be taken from their salary.
The below table shows how an individual paying 5% of gross salary into a defined fixed pension would be set to either lose or benefit :-
|Proposed Flate Rate|
Relief @ 25%
The treasury has not decided on how or if the changes are to come into effect but we are sure that the budget will shed some more light on how these changes may affect us all.