Predicting what is going to happen in an upcoming Budget is always a risky game, and never more so than this week. Following months of speculation – fuelled, it has to be said, by a succession of Treasury briefings – that the Chancellor would reform tax relief on pensions, George Osborne has now apparently decided to do no such thing in his 16 March speech.
A politic move
That the government would reduce the tax relief offered to higher- and top-rate taxpayers appeared to be a racing certainty until Osborne leaked his change of heart to newspapers on Friday night. While the justification for cutting relief for higher earners seemed to be sound – and likely to save the government billions of pounds a year – it appears that a backbenchers’ revolt has forced the Chancellor to change his mind.
Clearly, limiting tax relief to 20% would have had a significant impact on many voters’ pension pots – and while the next general election is some way off, there is the issue of the EU referendum in June to bear in mind.
Sound reasons to delay reform
But politics aside, there is a decent argument to be made for not tinkering with pensions policy this year given the succession of dramatic changes that have been introduced recently. From increasing the state retirement age and overhauling the state pension itself to fundamentally changing how people take their retirement income, the pensions landscape today is almost unrecognisable from a few years ago. Complexity is frequently cited as one of the main reasons people are turned off by pensions, and constant change is bound to make matters worse: as such, Osborne’s change of heart on tax relief might be a blessing.
In any case, many commentators still expect some change in the way relief is applied to be brought in before the end of the current parliament in 2020, so higher- and top-rate taxpayers should consider maximising their contributions in the short term.
So what else has the Chancellor got planned?
Whatever his future pension plans are, however, the Chancellor is going to have to look elsewhere for his Budget day headlines. While many analysts might be reluctant to stick their necks out again following the weekend’s events, there have been some suggestions over the last couple of days that the government might take steps to increase the amount that can be earned before higher-rate tax kicks in – at the moment, it is due to rise to £43,000 a year from April but this threshold could be pushed up towards nearer £50,000 in coming years if speculation is correct.
Some papers have also pointed at a possible cut in the top rate of income tax, which currently stands at 45%, while there is also the possibility that Osborne may raise fuel duty. This tax has been frozen for the past few years, but the current low oil price means that Treasury revenues from petrol and diesel sales are particularly low at the moment. A hike in duty, although likely to face stiff public opposition, could help make up this shortfall.