45% tax relief on pension contributions is expected to be withdrawn in the summer Budget – should you be maximising contributions to claim the relief now?
New limit on tax relief for 45% payers
The Conservative party's manifesto committed it to reducing the tax relief on pension contributions for individuals earning more than £150,000 – to pay for other measures such as a potential new inheritance tax allowance for individuals' main residences. It is expected that this pledge will be confirmed in the summer Budget on 8 July 2015.
It is understood that the restriction will work by gradually reducing the individual's annual allowance, currently a maximum of £40,000, by £1 for every additional £2 of income (over £150,000 a year) to a minimum allowance of £10,000 a year. This means that individuals with an annual income of £210,000 or more will only be entitled to an annual allowance of £10,000. Contributions in excess of the annual allowance will trigger a tax charge at the individual's marginal rate – effectively withdrawing the tax relief on the excess contribution.
Special rules may also be required to prevent the manipulation of income so that the individual has income just below the £150,000 limit one year and income significantly above the limit in the next.
It is not clear how the carry forward rules for unused annual allowances for earlier years will work in conjunction with the new restriction but it is hoped that full carry forward will continue so that there is no retrospective restriction.
For high earners who are members of defined benefit schemes, these changes are likely to lead to an annual allowance charge every year - although it is possible to elect for this to be paid from the pension fund. It is expected that the legislation will also incorporate anti-avoidance provisions to cater for salary exchange arrangements involving pensions.
Maximising relief now
Due to its potential complexities, it is perhaps unlikely that this limit on tax relief will take effect from 8 July 2015 (the date of the summer Budget) but that cannot be ruled out. To be certain of maximising tax relief on their contributions, individuals who have an annual income in excess of £150,000 should urgently consider making contributions to use up their annual allowance for 2015/16 and any unused allowances for earlier years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.