The autumn Budget, announced by the government last night as due on 22 November, will bring changes to the annual allowance, reducing the tax relief available to savers, several experts told FT Adviser.
The annual allowance - a limit on the amount that can be contributed to pensions each year, while still receiving tax relief – could be reduced from the current £40,000 to £30,000.
The government is also expected to lower the tapered annual allowance, from £150,000 to £120,000. This allowance is applied to high earners, and means that for every £2 of income above £150,000 per annum, £1 of annual allowance will be lost.
An HM Treasury spokesperson declined to comment if these changes to the allowances will be part of next budget.
Rachel Vahey, product technical manager at Nucleus, said that are “generally still concerns about the level of tax relief given on pension contributions”.
David Gauke, secretary of state for work and pensions, ruled out “fundamental” changes to pensions tax relief in July.
But Ms Vahey said she does not believe Mr Gauke’s announcement “rules out the possibility of smaller changes to the values of the various annual allowances”.
There has only been one year (2013/14) in the last eight years where the values of both the annual and lifetime allowances stayed the same, or where no new annual allowance was introduced, Ms Vahey pointed out.
Changes in allowances
Earnings > £150k
Earnings > £150k
Sir Steve Webb, head of policy at Royal London, said that “the Treasury is broke” and needs to find more ways to increase its revenues.
Sir Steve cited ONS figures, which show that the government cost with tax relief increased £3.3bn between 2014/15 and 2015/16, achieving £38.2bn in this period.
This is the highest value of the cost with tax relief in the last 16 years.
Sir Steve believes that due to these figures a cut in the tapered allowance is going to happen, which the reduction in the annual allowance is “possible and less likely.”
According to Malcolm McLean, senior consultant at Barnett Waddingham, both cuts are possible and that they would imply that “more people lower down the income scale start to be affected”.
He said that a cap of £30,000 on the annual allowance is “still quite a bit higher than most would be looking to pay into their pension in a normal year”.
But for those on irregular earnings, such as the self-employed, it would “restrict the amount they can pay in on good year looking to catch up on earlier bad years,” he said.
Similarly, it could catch out many more in a defined benefit scheme “in a year when they get promoted and get a reasonable pay rise, leading to them exceeding the limit and getting a tax penalty,” he added.
Mr Mclean said that the tapered annual allowance is “total nonsense, ridiculously complex and includes in the limit other income not just pension contributions”.
According to a survey by Suffolk Life, eight out of 10 (84 per cent) advisers had significant issues with the new annual allowance tapering rules.