Employers reject pension tax relief upheaval

On the 16 March, many industry experts believe the government will announce that no new pension contributions would be eligible for higher rate relief. Anyone who made a contribution after that date would be ineligible to claim extra relief through their tax return. Higher and additional rate taxpayers contributing to certain company pension schemes would suffer additional tax charges of 20% and 25% on each contribution respectively.

However a move towards a universal flat rate incentive would prove unpopular with employers, according to a survey by Hargreaves Lansdown.

Only 30% of employers are in favour of changing the tax relief available on pensions. Of these employers, 53% favoured a flat rate of tax relief, with 41% wanting that flat rate at a higher level than the basic rate of tax relief.

79% of employers that offer salary sacrifice are concerned it will be withdrawn.

Hargreaves Lansdown believes that a reduction to the Annual Allowance is also highly likely, possibly down to as low as £25,000, and added that we could see the abolition of the Lifetime Allowance.

Nathan Long, Head of Corporate Pension Research at Hargreaves Lansdown, said:

"Rumour of a move to flat rate tax relief on pension contributions will be unwelcome with employers who are not keen on further upheaval. A flat rate could abolish pension salary sacrifice as we know it, as well as potentially introducing further tax on employer contributions. With any change potentially not being implemented until April 2017, to accommodate system changes, the government would probably have to introduce some immediate measure to stop higher earners from exploiting this last gasp opportunity. This could cause issues for any employers with bonuses payable in March should members wish to sacrifice them into the company pension.

"A flat rate of tax could still see a further fall in the annual allowance, potentially leaving employers with yet more work to do on finding alternative ways of rewarding their highest earners."

Tom McPhail, Head of Retirement Policy, added:

"We have always viewed a flat rate of relief this as the most likely outcome. Logically, if the Treasury is going to announce a flat rate system for the future, they’d have to bring down the shutters on 16 March, in order to prevent wealthy investors from grabbing any last share of the higher rate relief before it is abolished. If they didn’t do this, we estimate that it could cost the government an extra £6 billion within just a few weeks. Any higher earners who are looking at paying into a pension, should think seriously about doing so before 16 March. Conversely, for basic rate taxpayers, it may make sense to wait until after that date.

"Any changes of this nature should also be accompanied by the abolition of the Lifetime Allowance and the Annual Allowance Taper, both of which are heavily bureaucratic; the Lifetime Allowance is also a penalty on good investment performance, which is surely not what good policy should look like."