Britain’s personal finance landscape is due for a shake-up when the new financial year begins on 6 April.
All change from 6 April
We have already covered the forthcoming launch of the Innovative Finance ISA (IFISA), which will allow the likes of peer-to-peer loans to be held in a tax-free wrapper.
Also being introduced is a measure which will allow individuals to earn up to £1,000 interest before they have to pay any income tax (for higher-rate taxpayers, this allowance will be £500). But could there be further changes in the pipeline? Over the past year, the government has made it clear that it is considering reforming the system of tax relief on pension savings.
Pension savings tax relief explained
At the moment, any money you save into a pension is treated as if no income tax is liable on it. In some cases, companies take pension contributions from their employees’ salaries before deducting tax.
Alternatively, the government applies tax relief when any contributions are made. For basic-rate (20%) taxpayers, this means every £80 they pay into a pension from their taxed income is “grossed up” to £100. Higher-rate (40%) taxpayers can claim a further £20 via their annual tax returns, while top-rate (45%) taxpayers get an extra £25.
Why might it change?
The principle behind this is that people should be encouraged to put money into pensions, and offering an income-tax break is the simplest way of doing so. But in practice, this means that the nation’s highest earners in effect get the biggest subsidies – something that a lot of people, possibly including the Treasury, think is unfair.
As a result, there has been increasing speculation that, in March’s Budget, Chancellor George Osborne will announce that higher-rate tax relief on pension contributions will be scrapped (it is already due to be scaled back for top-rate payers in 2016-17). This could mean everyone getting a single 20% rate of relief: this could make a huge difference to the amount of tax revenue the government is able to collect.
Preparing for the tax relief changes
If such a policy is announced, it seems most likely that it will be put into effect at the earliest opportunity, that is on 6 April 2016.
If it were to be delayed until 2017, it is likely that a large number of 40% taxpayers would spend the next 12 months maximising their pension contributions in order to take advantage of the extra relief while they still can.
It may be prudent, therefore, for higher-rate taxpayers to think about increasing their contributions over what is left of the 2015-16 tax year – provided they can afford to do so – just in case relief is cut.
Will basic-rate taxpayers benefit?
There is also some speculation that basic-rate taxpayers could in fact benefit from a reformed system: Osborne may decide to introduce a single level of relief around the 25% or 30% mark so that higher-rate taxpayers do not suffer quite so much.
While the logic behind a change in the tax-relief system appears sound, it is worth asking whether now is the right time for this kind of tinkering. After all, it is less than 10 months since wholesale reforms to the pensions regime were introduced for those reaching retirement – and on top of that, there are wide-ranging changes to the state pension due in a just few weeks’ time.
There is surely the risk that this apparently constant upheaval will put many people off pension saving altogether.