In a shock to absolutely nobody, chancellor Rachel Reeves has unveiled a £22bn black hole in the nation’s finances that, she claims, resulted from the irresponsible decisions taken by her predecessor at the Treasury, Jeremy Hunt.
Regardless of the rights and wrongs of those claims – and there is vociferous disagreement from the red and blue corners of British politics – Reeves has been clear tax rises are all but inevitable in the Budget on October 30.
We also know that the rates of income tax, national insurance and VAT will not go up. Those are the three big taxes on income and spending, which could raise billions if increased by just a percentage point. Which begs the question for advisers and clients, where exactly is the tax pain going to be felt?
Nature abhors a vacuum and so speculation about potential pensions tax raids has already begun. As always ahead of Budgets, advisers play a crucial role in ensuring clients are not knocked off course by speculation about possible pension tax changes.
In reality, nobody at this stage knows exactly what will happen on October 30 – including, most likely, Reeves herself.
Tax-free cash raid?
Rumours about the future of pensions tax-free cash almost always surface ahead of major fiscal events. However, stripping back this element of retirement saving would be deeply unpopular and fundamentally undermine wider government efforts to boost long-term investing, including in UK plc.
It would also inevitably be hugely complicated, as those who have already built-up entitlements to tax-free cash under the existing rules would almost certainly need to be protected against a retrospective retirement tax.
Furthermore, the overall amount people can access tax-free has already been reduced significantly over the past 14 years, and if the current figure remains frozen, it will continue to be eroded in real terms.
Higher-rate relief culled?
The most common pre-Budget pension tax relief speculation centres on the future of higher-rate pension relief and the potential to introduce a flat rate of pension tax relief.
At the more extreme end, this measure could see pension tax relief restricted to the basic rate of 20 per cent for all, with advocates suggesting this could raise billions of pounds of extra revenue for the Treasury.
However, as with most radical pension tax changes, introducing a flat rate of relief is much easier said than done.
A huge chunk of any potential savings to the Treasury from a pension tax relief raid would come from defined benefit schemes, the majority of which now reside in the public sector.
If a flat rate of pension tax relief below 40 per cent were applied on these schemes, the only way to ensure the correct level of tax relief was applied to contributions from higher and additional-rate taxpayers would be to hit those members with a tax charge likely running into thousands of pounds.
