Autumn Budget – cuts to pension tax relief around the corner?

Tax relief cost the Treasury an estimated £37 billion in 2017/18. And with former Chancellor, Philip Hammond, once describing it as “eye-wateringly expensive” it’s no wonder that it comes up whenever the government is looking to balance the books.

Throw a global pandemic and £1.95 trillion of debt into the mix, and these rumours look more viable than ever.

We take a look at why tax relief could be cut for higher earners in the Autumn Budget. And why you could lose out if you don’t consider acting now. Remember no changes have been confirmed yet.

This article and our tools aren’t personal advice. If you’re unsure whether a course of action is right for you please seek advice. Keep in mind that you can’t normally take money out of a pension until at least age 55 (rising to 57 in 2028). Remember all investments fall as well as rise in value, so you could get back less than you invest. Tax rules change and benefits depend on your circumstances.

How does pension tax relief work?

At the moment, you’re able to claim tax-relief on personal pension contributions up to the highest rate of tax you pay (providing you’re within your pension contribution limits). If contributing to a personal pension scheme, basic-rate tax relief (currently 20%) is reclaimed automatically and added to the pension.

Any further tax relief needs to be reclaimed from HMRC, which most people do via their tax return. This means that those who pay tax at a higher rate could reclaim up to an extra 25% tax relief on what they pay in (up to an additional 26% if you live in Scotland).

If contributing to your employer’s pension scheme by salary sacrifice, the tax saving could be instant.

While it’s a great incentive to get people saving for their retirement, it’s no secret that it’s a hefty cost for the government too.

Our guide to pension tax relief

What could a reform to pension tax relief look like?

One way of cutting these costs could be to introduce a flat rate of tax relief, perhaps between 25% and 33% (as reports originally suggested back in 2016).

While this would be an uplift for those who pay tax at a rate below the chosen flat rate, it would be a step down for those who pay tax at a higher rate. Whatever the flat rate, it would need to save enough to justify the change, and those who pay tax at higher rates would most certainly feel the hardest pinch.

Another option could be to scrap higher rates of tax relief on pension contributions altogether. Restricting tax relief to 20% for everyone would be an unpopular move. But on the other hand, it’s a simple way to reform a complex system.

Why is now different to previous years?

Tax relief has survived multiple threats over the last few years (2016 being a particularly close shave). But, as we’re all tired of hearing, these are unprecedented times.

The public is aware of just how much the government has had to spend to keep the country afloat during lockdown. When we’re facing a deficit of epic proportions, it’s expected that radical changes are needed to start bringing it down.

Timing your pension top up

We don’t know whether changes to tax relief will go ahead, let alone when. But if you’re planning to top up your pension anyway, you might not want to leave it to chance.

Any changes announced in the Autumn Budget (which might take place in October or November) could take effect immediately, so:

• If you pay tax at a higher rate, it could be time to think about topping up your pension before the Budget to secure tax relief at your marginal rate.
• If you’re a basic rate tax payer (or you don’t pay tax), it could be worth thinking about waiting until after the Budget to add any planned lump sums. Although waiting to invest could mean you miss out if the market goes up, although the opposite is also possible and you could get back less than you invest.

Remember, these changes are just speculation – you shouldn’t treat this as advice. There’s also no guarantee there will be any changes to pension tax benefits.

Before you decide, why not see how much you could get in tax relief if you are considering topping up now.

Try our pension tax relief calculator

How to add money to a pension

To make the most of tax relief and the advantages it offers, you could consider increasing the amount you pay into your workplace pension or your own private pension. Or you could consider opening your own private pension such as the HL Self-Invested Personal Pension (SIPP). The HL SIPP is for investors who are happy to make their own investments decisions.

More on the HL SIPP

If you already have an HL SIPP, it’s quick and easy to top up your pension online using a debit card. Once you’ve read the Key Features, simply log in to your account, select your HL SIPP and click ‘add money’.

Top up your pension