Tax relief off the table but Budget could still bring surprises

The pensions industry may have breathed a sigh of relief over the weekend, as The Times reported that chancellor George Osborne has called a ceasefire on his purported ‘raid’ on tax relief. 

Antagonism over the potential hit to middle and higher-income earners has risen over recent weeks – the same demographic relied upon to form the backbone of voters opting to remain within the European Union in June’s referendum. 

Assuming the reports are correct, is this off the table for good or is it just a delay?

Tim Smith, Eversheds

Mooted proposals for a flat rate of tax relief on pension contributions would hit higher-rate taxpayers, while a pensions Isa would end upfront tax relief on pension contributions, instead allowing savers to draw their income tax free in retirement.

By backing away from either proposal next week, Osborne may bring some relief to an industry in need of stability. However, while headline changes are off the cards, industry commentators remain convinced that further tinkering lies ahead.

Full stop or just a delay?

Tim Smith, senior associate at law firm Eversheds, questioned whether the reported change in tack marked a “full stop” or merely a postponement of the chancellor’s plans for tax relief. 

“Assuming the reports are correct, is this off the table for good or is it just a delay?” he said.

Smith said there was still significant scope for further “tinkering” within the current system, including changes to salary sacrifice arrangements or the removal of exemptions from national insurance contributions for employer pension contributions. 

Chris Noon, partner at consultancy Hymans Robertson, said a shift to make all pension accrual subject to NICs, rather than just employee contributions, was a “red-hot favourite” for the Budget, netting HM Treasury an additional £14bn. 

Noon said such a move, which could be characterised as a “tax on jobs”, could upset large swathes of employers. It would, however, be more palatable to individuals and therefore minimise the risk of “disenfranchising the Tory heartland”. 

“That would be a really neat way of saving a load of money,” said Noon.

Not convinced

After a whirlwind two years of successive changes, many in the pensions industry have called for a period of stability.

But Henry Tapper, director at consultancy First Actuarial, said the current system is “broken” and any decision to step down from or delay reforms is merely a “forestalling measure” by HM Treasury.

“There are lots of ways the chancellor can tax us on our pensions other than reducing tax relief,” he said.

This could include an adjustment to the taxation of defined benefit pensions via modification of the government actuary’s conversion factor or a further reduction to the annual allowance, he said. 

In the short term however, Tapper said the government will want to actively discourage the “buy now while stocks last” attitude that has given rise to a ramping up of contributions in the months ahead of the Budget.

Phil Wadsworth, director at consultancy JLT, said he will be waiting until after Osborne's announcement on March 16.

However, he said mere postponement of plans until after the summer referendum could present the industry with further difficulties. 

“That would mean a return to the planning blight,” said Wadsworth. “But I will believe it once we get past the Budget.”