Potential changes to pensions: What to look out for in the Autumn Budget

9 October 2024

by Paul Gooch, Driector at Walker Crips Financial Planning

With Labour’s first Budget in nearly a decade and a half approaching, potential changes to pension tax relief have been a topic of speculation. However, recent reports have clarified that some of these possible changes may not come to fruition. This article outlines some of the latest updates and potential changes that could still impact your pension, retirement, and wider financial planning strategy. Staying informed and acting early could help you make the most of your retirement savings in a changing tax landscape.

In his recent Downing Street Rose Garden speech, Keir Starmer hinted at tough measures in response to the fiscal challenges inherited from the outgoing Conservative government. The projected £22 billion deficit meant that pension tax relief was expected to be a key focus. Labour aims to avoid raising National Insurance, income tax, or VAT, but cuts in other areas could affect pensions.

This article isn't personal advice. You should speak to a financial planner if you're unsure of the best course of action. Pension and tax rules can change, and their benefits depend on personal circumstances. 

What is pension tax relief?

To encourage people to save for their retirement, each time you make a payment to a personal pension the government also makes a contribution. This is known as pension tax relief. The relief rate depends on your income tax band:

• Basic rate taxpayers and non-earners receive 20% in tax relief.

• Higher rate taxpayers can claim up to 40%.

• Additional rate taxpayers may claim up to 45%.

However, to claim the higher rates of tax relief on a pension contribution, you must have enough taxable income in the Higher or Additional tax bands. Scottish taxpayers face different tax rates and relief limits.

Current pension tax relief rules

Provided you are under the age of 75, you can receive relief on contributions of up to 100% of your UK earnings, or £3,600 per annum if this is greater (if you are a low or non-earner), although contributions, including employer contributions, are also limited by an Annual Allowance which is £60,000 for the 2024/25 tax year. The Annual Allowance may be lower for higher earners or those already taking an income from a pension. 

How to claim pension tax relief

For personal and many workplace pensions, Basic rate relief is applied automatically, for example if you are able to make a contribution of £40,000, you will make a payment of £32,000 and £8,000 of Basic rate tax relief will be added by the Government. Higher rate and Additional rate taxpayers will then complete a self-assessment tax return in order to claim any additional tax relief, with the tax relief being refunded directly to them.

Possible changes in the Budget

Whilst it will not be known until 30th October 2024 exactly what changes will be made to pensions, there has been speculation regarding the following potential changes. However, more recent press reports have ruled out some of these changes:-

• Flat 30% rate for pension tax relief:

There had been speculation that all pension contributions could qualify for a flat 30% tax relief rate. This would have been welcome news for Basic rate taxpayers, who would see their £1,000 pension contribution cost them only £700 rather than £800. However, it would have spelled bad news for Higher and Additional rate taxpayers, who currently see their £1,000 contribution costing them £600 or even £550 respectively.

However, according to a report in The Times on 6th October, Chancellor Rachel Reeves will not make any changes to pension tax relief in the upcoming Budget. The Treasury reportedly abandoned any plan to overhaul higher-rate taxpayer relief after assessing the impact on public sector workers, such as nurses earning £50,000, who could face an additional tax bill of £1,000 if tax relief was lowered.

• Restrictions on tax-free cash:

Most individuals on reaching age 55 (rising to 57 in 2028), can currently withdraw 25% of their pension savings tax-free up to a maximum tax-free amount (currently £268,275). Whilst the 25% tax-free cash could be maintained, the government could choose to reduce the maximum tax-free amount that savers can take.

• Reintroduction of the lifetime allowance:

The lifetime allowance was a cap on how much savers could save in their pension pot before being subject to tax of up to 55%.  This was scrapped by the former chancellor, Jeremy Hunt, in 2023 and replaced by a restriction on the amount of tax- free cash that could be taken. 

At the time, Labour was quick to assert that it would reintroduce the allowance if it won the general election. However, there was no mention of the lifetime allowance in Labour’s election manifesto, and it was widely considered a complicated piece of pension tax legislation which would be difficult to reintroduce. As of now, there is no indication that it will return in the upcoming Budget.

• Reduction of the Annual Allowance:

The £60,000 Annual Allowance could still potentially be reduced to a lower amount, but as yet no firm details have emerged to confirm this.

• Review of corporation tax relief on employer contributions:

Currently, HM Revenue & Customs (“HMRC”), the department of the UK Government responsible for the collection of taxes, treats company pension contributions as an allowable business expense, which can be offset against a company’s corporation tax bill. There has been some speculation that the chancellor may review the status of company pension contributions in the Budget.

• Inheritance Tax (“IHT”) protections within pensions:

Pensions are currently exempt from IHT and can be passed to beneficiaries without IHT applying. If death occurs before age 75 then no tax applies, and if after age 75 then the beneficiary will pay income tax at their marginal rate, on any withdrawals made. However, there is speculation that the government may consider including pensions in IHT to raise additional revenue. The Institute for Fiscal Studies (“IFS”) estimates that taxing pensions on death could generate several hundred million pounds annually, potentially rising to £2 billion in the future.

As outlined earlier, it is important to emphasise that the potential changes to pensions are based on rumour and speculation and we won’t know for certain what (if any) changes will be made until after the Autumn budget.

Conclusion

Whatever the fall-out following the Autumn Budget, it will remain crucial to make the most of all the pension allowances to which you are entitled, to build your financial resilience in retirement.

If you need any help or advice when it comes to putting a plan in place for your “post-work” life, contact the team at Walker Crips Financial Planning. Our team of experienced financial planners are on hand to offer you expert advice and guidance every step of the way.