Pension savers might benefit now, but are changes on the horizon? | HK Wealth

Pension saving could undergo a revolution following the Chancellor’s decision to launch a consultation on tax relief for pension contributions, according to recent post-Budget analysis by ‘This Is Money’. Currently, investors enjoy a big tax break when they pay into a pension, with high earners getting the greatest perk.

A basic rate taxpayer, for example, gets 20% relief turning an £80 contribution into £100. But a higher rate taxpayer gets double the relief at 40%, turning £60 into £100 and an additional rate taxpayer 45%. But the review could result in tax relief being scrapped or replaced with a flat rate – say 20 or 30%. Indeed, pension saving could be put on the same footing as ISAs with contributions made out of net pay, funds building up tax-free and then withdrawals being tax-free.JAR_PENSION1-e1409224432636

This is Money suggests in its article that in particular, those with taxable income in excess of £110,000 may wish to act fast. This is because from April 2016, their ability to fund a pension will be curtailed by new rules confirmed in the Budget. The rules will result in the loss of part of their annual pension allowance – the maximum amount that can be invested tax-free in their fund. The limit is currently £40,000 but, according to fund broker Hargreaves Lansdown, someone earning over £210,000 will see a £30,000 cut in their annual allowance, effective losing £13,500 in tax relief.

For savers in general, the budget is a mixed bag. Changes announced or confirmed in the Budget include a new £5,000 annual dividend allowance, meaning that from April next year, the first £5,000 of dividends investors receive will be free of tax – irrespective of the tax band they fall in. However higher levels of dividend income returns will attract progressively higher rates of taxation.

For many savers though, the changes in the budget are still perceived as ‘tinkering at the margins.’ All savers should seek independent financial advice to ensure their savings are working appropriately for their goals.

Sources: www.thisismoney.co.uk (Post budget analysis articles: 2015/07/14)