Finance Bill confirms reduction of MPAA to £4,000

When the General Election was called this measure was dropped from the Finance Bill, however Treasury Minister Mel Stride announced in July that the government would be reintroducing Budget cuts to pensions tax relief with effect from April 2017.

The government says cutting the MPAA allowance will limit the "extent to which people can recycle their pension savings to get extra tax relief".

Other measures introduced in the Finance Bill include new penalties for those who enable the use of tax avoidance schemes, abolishing permanent non-dom status, and reducing the dividend allowance from £5,000 to £2,000 from April 2018.

Mel Stride, Financial Secretary to the Treasury and Paymaster General, said: "A fair tax system is a key part of our plan to build a fairer society.

"The UK is a world leader in tackling tax avoidance and evasion, but we must continue to take action to ensure everyone pays their fair share. The Finance Bill will allow us to do just that by preventing companies and individuals from using complicated tax structures to avoid paying the tax they owe, and penalising people that help them to do it."

Carolyn Jones Head of Pensions Proposition at Fidelity International, commented: “The dumping of the MPAA changes prior to the General Election was always a postponement of the inevitable. However, seeing it retabled - while expected - is not positive.

“The Government had genuine concerns about recycling which it was right to examine carefully however, we have seen there is little evidence of behaviour driven by any dishonesty or urge to play the system. It appears that this change has been introduced to limit behaviours that do not  exist and is, therefore, non sensical.

“However, the impact of a cut in the MPAA will be felt in very real terms by consumers and employers alike. It is set to have a negative impact on employers who are already overburdened with red tape while younger and older consumers whose positive experience of the freedoms will now be coloured by what they may feel is retrospective barriers to getting their money.

“Consumers’ lack of trust in pensions is largely driven by constant changes to the rules and this constant chipping away around the edges only serves to undermine people’s confidence in long term pensions saving due to the constant moving of goal posts.”

Les Cameron, retirement expert at Prudential, added: “The Government’s rationale is to stop people taking money out of their pensions and recycling this to benefit from tax relief twice. Most personal pension contributions benefit from tax relief, effectively adding 25% to each payment. Higher and additional rate taxpayers will also be able to reclaim further tax relief in their tax returns.
 
“Reducing the MPAA will save the Government money but pensions savers who have a spouse who isn’t making the most of their pension contributions can increase their family’s overall wealth without falling foul of the rules.
 
“Savers can make contributions into  children’s and grandchildren’s pensions offering additional opportunities to increase the overall family wealth. However, remember that tax can be complicated and taking professional advice will help savers avoid pitfalls.”