Not only the current government but also the previous coalition government had identified the rising cost to the Treasury of the tax and national insurance relief that is given on pension contributions.
The government’s Green Paper titled Strengthening the Incentive to Save: a Consultation on Pensions Tax Relief that was announced on 8 July 2015 reported that a sharp increase in costs to the Treasury from 2009/2010 had reached its peak in 2010/2011 at £35.3bn, before dropping slightly to £35.1bn in 2012/2013.
It would seem that the reduction in the annual allowance, and also to a degree the lifetime allowance, was having some effect. This reduction in cost between 2010/11 and 2012/13 represented a 0.57 per cent fall while over the same period total Treasury tax receipts from all sources increased from £522.4bn to £550.6bn – a 5.39 per cent increase.
Despite the cost to the Treasury of the reliefs reducing as a proportion of total tax receipts as a result of action taken to date, they have not been seen to be sufficiently helping reduce the overall deficit and, in addition, concerns remain about the distribution of the tax reliefs where two-thirds applies to the higher or additional rate taxpayers. Although this article focuses on July’s announcements of the tapering of the annual allowance and the alignment of pension input periods (PIPs) it is impossible to consider these elements in isolation without an eye on the government’s Green Paper announced immediately after July’s emergency Budget. This document asked for opinions on the effect of tax relief as an incentive to saving, but introduced the theory that the intention may also be to accelerate the reduction in overall relief so as to further aid the deficit reduction.
The changes already implemented are far from the concept of pension simplification, and their complexity means that many individuals will need the advice of financial advisers and tax specialists in the forming of future remuneration and savings plans.
The government introduced the tapering and transition measure effective from 6 April 2016. It will have the effect of restricting tax relief through a tapered reduction in the annual allowance for individuals with an adjusted yearly income of over £150,000 and who have a threshold income of over £110,000.
It is first necessary to understand the new concepts of adjusted income and threshold income. Adjusted income is:
■ an individual’s net income, plus
■ any relief under the net pay system (that is, it is added back in), plus
■ any relief on making a claim (again, added back in), plus
■ relief claimed by non-domiciled individuals to overseas pension schemes, plus
■ the value of any employer contributions for the tax year, but less
■ any lump sum death benefit received which is subject to tax because the deceased died at age 75 or over.
Threshold income is:
■ an individual’s net income, plus
■ any employment income given up for an employer pension contribution as a result of any salary sacrifice made on or after 9 July 2015, less
