Budget tax relief rumours

I was going to open by commenting that it’s the time of year when the budget rumour mill starts kicking into action, but of course this will only be the second Autumn Budget, so we’re more accustomed to these things happening at the start of the year.

Some things don’t change though. Every year since about A-Day (or at least it feels like it!) someone seems to want to suggest PCLS is going to go, or else why were the words ‘tax-free’ removed? Like every other year, we’ve heard and seen nothing to support this theory.

The biggest rumour rearing its head again is, of course, around tax relief. The debate around flat rate relief rages on. The Royal Society of Arts has recommended a rate of 30%, the Resolution Foundation a rate of 28%, with a rate of 25% also being mooted.

Michael Johnson at the Centre of Policy Studies goes a step further and proposes abolishing tax relief altogether and replacing it with a bonus on individual and employer contributions disconnected from tax-paying status.

What many of these papers (with the exception of Mr Johnson’s more radical approach) fail to adequately address is where employer contributions fit in. If we move to a flat rate of relief then there is a big incentive for higher earners to use salary sacrifice. In theory this could be banned, but in practice this would be very difficult, especially for those higher up in organisations or managing their own companies.

After a good year when salaries, bonuses and pension contributions are being reviewed, if the salary remains level but the employer pension contribution increases, is that salary sacrifice? Was there ever any offer of a higher salary that’s been given up? Similarly, what happens to net pay arrangements? Many schemes, including most SSAS, are set up to only accept contributions on a net pay basis.

If Philip Hammond does decide to make some changes in relation to tax relief then, in the interests of simplicity, a cut in the annual allowance would be the lesser of two evils. If this is the move made by the Chancellor then £20,000 sounds like a plausible figure – parity with ISA savings and still more than enough for your average middle-earner. It would be nice to think that with such a cut we could lose the horrendous complexities of the tapered annual allowance, but I may be getting carried away.

Given that the lifetime allowance was introduced to cap pension savings when contributions were permitted up to the dizzy levels of £215,000+, if we do get an annual allowance of less than a tenth of that you would think the lifetime allowance would be redundant and could be scrapped. But now I’m really in dreamland.

Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.