With the next Budget firmly in sight, the rumours of culling higher rate tax relief are rife. This time, we are hearing it may just be older people that will see the cut, with the young reaping the benefits of a “tax on age”.
I have been quite vocal in the past about the issues I see with flat rate relief or the removal of up-front relief, but this is on another level of complexity.
If this really is something being considered, I can only hope there is a thorough consultation with the pension profession to establish whether it is workable. I do not think it is.
Just taking the issue of employer contributions in isolation shows what we would have to deal with should it become policy. Indeed, this is one of the biggest issues with any change to personal tax relief on pensions.
Although it would appear some of the suggestions simply ignore employer contributions as if they are a completely different issue, they are not and need to be considered as part of the bigger picture.
Should there be a cap on personal tax relief, then what is stopping an employer from changing all their contracts to include a non-contributory pension scheme with a lower salary? Employer contributions to pensions form part of an overall remuneration package and, as it is not taxed as salary, it is effectively a tax-free payment to the individual, which means the payment gets full marginal rate tax relief. Not to mention employer pension contributions are not subject to National Insurance.
This means they will need to be monitored. The annual allowance is not sufficient for this because, although it is used to cap overall tax relievable pension contributions, it does not test personal tax relief. The complexities of pension tax relief is why we have the annual allowance in the first place.
So, what are the options? Firstly, we know salary sacrifice would have to go but how do you deal with the example of a complete change of employment contract? Employer contributions would need to become a type of benefit in kind to ensure the individual is not receiving any tax relief they should not. This would add a lot of complexity to the calculations required by advisers, individuals, employers and HM Revenue & Customs, which will always end up costing money to monitor.
I know the suggestion is that we do away with tax relief and replace it with a Government funded top-up but this is really just the same and does not get away from the problems above.
This is one of the biggest issues if we are only looking at defined contribution schemes but once you factor in defined benefit schemes and the complex funding of those we could end up with multiple tests on contributions both personally and by employers. This would increase the complexity once again, which is never an encouragement to anyone to save.
Claire Trott is head of pensions strategy at Technical Connection