Are You Ready For Annual Allowance To Be Slashed?

Are You Ready For Annual Allowance To Be Slashed?
Underwater by Andy Deitsch. Why?

Experts predict a new tax raid on Annual Allowance to cover the £2 billion budget deficit that was created when the National Insurance Contributions increase was cancelled

Annual Allowance Could Be One Of The Pension Tax Breaks At Risk

How Cutting Annual Allowance Could Raise Billions

Despite a recent hint that earlier Conservative manifesto tax pledges may not be honoured, if Philip Hammond does stick with them, he’ll have very little wriggle room in his budget.  He’s already U-turned on National Insurance Contributions and he’ll be unable to increase government borrowing. 

It leaves him little option but to target the generous tax privileges enjoyed by pensions.  Annual Allowance is one of these, which combined with the other tax breaks cost the Government around £25 billion each year. 

An Annual Allowance Reduction or Something Else?

Various ideas have already been mooted.  Less likely to be attacked is the £1 million Lifetime Allowance, which was cut in 2012, 2014 and 2016.

A possible option could be one flat rate of tax relief for everyone, likely to be less than 30p in the pound.  But those in the know suggest this wouldn’t go down well the majority of ‘middle England’.

What could be more likely is a reduction in the Annual Allowance that you can pay into your pension each year.  It currently stands at £40,000.  It could be cut to £35,000 or even £30,000.  It would enable the Treasury to tax more of your income.

Sir Steve Webb, the former pensions minister who’s now director of policy at the pensions company Royal London, said lowering the Annual Allowance to £30,000 could raise “approaching a billion” pounds a year, based on previous Treasury estimates. He said “hundreds of thousands of people” could be affected.

Why Annual Allowance Is In The Frame

The Annual Allowance has already been hit twice: for everyone in 2014 and for only high earners in 2016.  But there’s plenty more room left to play with.

The Government already has some form in this area.  It’s still pressing ahead with controversial plans to reduce the Money Purchase Annual Allowance from £10,000 to £4,000.  The Money Purchase Annual Allowance affects people who have flexibly accessed money purchase pension savings in a registered pension scheme.

Here’s the justification from the Treasury for this:

The Money Purchase Annual Allowance counters an individual using the flexibilities around accessing a money purchase pension arrangement as means to avoid tax on their current earnings, by diverting their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25 per cent tax-free. It also restricts the extent to which individuals can gain a second round of tax relief by withdrawing savings and reinvesting them into their pension.

The Money Purchase Annual Allowance reduction, which will come into effect on 6 April 2017, was first proposed by the chancellor in his 2016 Autumn statement.  It was heavily criticised during the consultation that ended in February 2017.  Here’s the consultation response from Zachary Gallagher, Chairman of Association of Member-Directed Pension Schemes, a body that represents many of the UKs SIPP and SSAS operators, on Money Purchase Annual Allowance.

The Treasury predicts this will raise £65 million for the 2017-2018 tax year, rising to £70 million in each of the following four years.  The decision was met with disappointment by the pensions industry, after some were hoping it would be scrapped or least postponed. 

Full details can be found on the Government’s website in a section called Reducing the Money Purchase Annual Allowance.

What To Do About Annual Allowance Now

In the light of the Treasury’s need to raise billions, it’s pretty clear that pensions are unlikely to become more tax efficient than they are today.  If changes are made, it’s likely you’ll be worse off in future from a tax break perspective.

With this mind, if you’re contemplating further contributions to your SIPP or SSAS, either using Annual Allowance or Money Purchase Annual Allowance, it might well be prudent to do so earlier rather than later.

At the moment, if you fully utilise your Annual Allowance, you can still use carry forward of your unused Annual Allowance from previous years.  Here’s a useful article with some examples showing how carry forward of Annual Allowance works. 

Whether carry forward remains must be up for debate too!

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