Pre-Budget predictions – plans to reform taxation on pensions abolished

In his budget next Wednesday 16 March the Chancellor, George Osborne, has the unenviable challenge of delivering promised tax simplification whilst also trying to reduce the UK’s budget deficit.

Like most, Grant Thornton would like to see further simplification of the tax system to one that works with businesses and not against it; and one that supports and stimulates a vibrant economy. But what changes are likely?

The Chancellor has made a commitment to return the public finances to the black from 2019-20. If government’s spending and borrowing targets are not achieved then tax rises or spending cuts may be implemented with little notice in order to bring the Chancellor’s plans back on track.

Among much of the ‘crystal ball’ commentary, one well publicised theme for this budget were the expected changes to the taxation of pensions, which would have had an impact on both employers and individuals.  

On Saturday morning George Osborne dropped the plans to end or alter tax relief on pension contributions, amid concerns that it would ‘damage saving’. With a degree of global economic uncertainty it has been suggested that now is not the right time for such radical reforms.   

Pensions have been under scrutiny throughout the past decade, with most previous pension changes focussed on restricting the tax relief for higher earners. The changes which were predicted would have been expected to impact all individuals with pensions and whilst not being introduced now may be introduced in a future reform.

One option would have seen the introduction of an ‘ISA’ style pension system, in which contributions would receive no tax relief but with such monies eventually being withdrawn tax free.

An alternative option suggested was to restrict relief to a flat rate which was widely speculated to be 33%, with lower earners benefiting while higher and additional tax rate payers seeing a drop in the amount of tax relief they would have been entitled to under the current system.

There was also wide speculation that the annual allowance on pension contributions may be further reduced from £40,000 to perhaps £25,000. Whilst not ruled out, this is now also expected to be unlikely.

Pensions tax reliefs

As the government has been trying to ensure the current incentives for individuals to save are effective, there was a real risk that the changes to pension tax reliefs which were proposed would have resulted in employees considering in greater detail whether pension saving remains attractive. 

On the other hand, employers would have needed to review their reward strategy for employees, as the proposed new rules would likely have led to an immediate cost impact for business and hence they would not welcome a wholesale change in the way they administer schemes.    

An announcement is still expected on the restriction of the tax efficient salary sacrifice arrangements (including pension salary sacrifice) following HMRC’s review announced in the Summer Budget 2015.

Whilst no giveaways are expected from the Chancellor in his Budget announcement, it is now less clear what the Chancellor will announce now given that he has abolished his plans for pensions reform at this late stage. Many businesses and employers will be monitoring the developments closely on Wednesday afternoon. As ever, professional advice should be sought regarding the impact of any changes announced.