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Are tax changes to UK pensions going to pay for Covid?

It’s widely accepted that it’s only a matter of time before the government takes more action to repay the debts created by the pandemic. Taxes are an obvious focus area, and recent indications show that pensions could be a target too. Peter Webb, our Head of Tax Advisory, takes a look.

Last month, certain HM Treasury documents came to light indicating that the government could be planning to tax pensions as part of its strategy to tackle the enormous cost of Covid. The plans, which could take shape as early as the autumn, would see a cut of the higher rate tax relief on pensions. Currently higher rate earners can claim up to 45% tax relief on pension contributions. Planning to reduce the amount, and introduce a flat rate scheme of 20% or 25%, could significantly impact the reliefs available for high earners, and subsequently their overall pension contributions.

This move, when combined with the State Pension triple lock, could have a profound effect on younger generations. The triple lock is the government’s commitment to raising the State Pension using a particular calculation: whichever is higher of consumer price inflation, average earnings growth, or 2.5%.

With no plans yet announced to scrap the triple lock, state pensioners are potentially due a sizeable increase in what they receive from April 2022. This has been driven by average earnings growth topping 5.6% last year, skewed in part by the effects of the pandemic. This hike in the State Pension would see future generations bearing the cost – estimated to be around £4 billion.

The leaked plans also include a proposal to tax employer pension contributions – impacting working age pension savers – as well as cuts to the pension lifetime allowance, the amount which can be amassed in a pension pot before charges apply. The allowance currently sits at £1,073,100 and could be reduced to £800,000.

All this throws into sharp focus the significant effect that some of these changes could have on many people. Pensions have long been the target when there’s a need to create revenue, and there are concerns that these moves will harm older savers who’ve been carefully planning their retirements, and perhaps also deter those of working age into saving for later years.

Recent research from Purely Pensions identified the possible pension gap in the future, with savers in their 20s potentially losing £21,000 at retirement if they delay pension contributions for the first five years of working.

To discuss any aspect of your own tax or financial planning, please get in touch with your nearest office.