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Do you know your limit?


Posted on 9 April 2015

Labour leader Ed Miliband recently announced that, should Labour get into power, he would restrict pension tax relief to 20%.  For additional and higher rate tax payers who currently get tax relief on contributions at 40% and 45% this would be a significant change.  The current Government also announced in the recent budget that the Lifetime Allowance is to be reduced to £1m in 2016.

Both of these changes have implications for anyone who is a higher rate tax payer and who make personal contributions to a pension scheme.

Restricting tax relief is nothing new.  There have been murmurings on the subject at budget times in the former Labour years and during this outgoing coalition government but no party until now has been so committed and definitive as Labour’s current stance.  We have already witnessed a reduction on the annual allowance to pensions from £255,000 per year down to just £40,000 in the current tax year, and likewise we have seen the lifetime allowance drop from £1.8m down to the current £1.25m and to the limit of £1million as announced in the recent budget.  

These proposals are therefore another significant swipe at pensions, which cannot be ignored.  Likewise, the general downward trend in allowances cannot be ignored either, as it affects middle income pension savers.

So, what are the implications of the downward trend?:

  • The lowering annual allowance means that it is becoming harder to build up sufficient pension funds for later life, particularly those who leave saving late.  This means the cost of delay is becoming ever more expensive.
  • If the annual allowance is exceeded by adding your own contributions to those of your employer or other third parties…there is a tax cost
  • If the lifetime allowance is exceeded this could lead to a one off tax charge of 55% on any excess saving.
  • Should you be looking at alternative investments? If so, what tax reliefs are available?
  • Do the changes have an impact on your employees / employee incentives? If so, how should you react?

Now is a good time to review the tax benefits of your investments and pensions. It is very unlikely under any Government that the current limits will rise. Should you, therefore, make a payment before the election?

What other tax reliefs may change post-election? Should you act now before it’s too late?

If any of the above is of interest or relevance we would be happy to meet with you to discuss further.


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