Despite a number of reports that David Cameron had urged the Chancellor to ‘play it safe’ over pension tax relief reform rather than risk the wrath of the Conservative backbenches in the run up to the European referendum, the announcement over the weekend was still a shock.
It had widely been expected the Chancellor would move against higher rate tax relief with further public spending cuts needed. A switch to 25% flat rate tax relief would have redistributed relief from higher rate to basic rate taxpayers and save the Treasury an estimated £6 billion a year. Tempting for a Chancellor looking for savings.
Whilst the threat of radical change to pension tax relief appears to have receded for now, our view is that we haven’t heard the last of this. The government spends £50 billion a year on pension tax relief and the desire to reduce this hasn’t gone away.
It is also worth noting that the announcement only stated that tax relief wouldn’t be altered. He could still make an announcement on details such as salary sacrifice and high earners will continue to be impacted by the reduction of the annual allowance.
We would still urge clients to make the most of the current system while it is still available. Further changes should still be expected in the life of this Parliament.