50p rate taxpayers should utilise their fleeting allowance
BUDGETS are rarely driven by economic sense. More often than not politics triumphs over clarity. And the coalition, like all previous governments, tried to manage expectations – threatening in the lead up to yesterday to tinker with the rules on additional rate taxpayers’ relief on pensions, only to leave the rules unchanged. As such, no news, became good news. But all is not well. Two pressures are pushing high earning savers in opposite directions: the lowering of income tax from 50 to 45 per cent in April 2013 is driving them to frontload pension contributions, while the threat of future tinkering risks the appeal of betting on politicians in the long term.
Additional rate taxpayers can’t rely on the goodwill of future chancellors. The £50,000 annual limit on pension contributions came in following George Osborne’s decision to overturn Alistair Darling’s punitive anti-forestalling rules. However, although the pensions industry celebrated the lesser of two evils, a long-term investment was once again subject to the whims of political expediency. The politicisation of pensions was also exemplified in the 14 October 2010 changes to the lifetime allowance for tax relief on pensions that will come in on 6 April 2012, reducing the pension lifetime allowance from £1.8m to £1.5m.
This time around the pensions industry got a relatively easy ride. However, as Graham Farquhar, employment tax partner at Ernst & Young notes: “From April 2013 pension contributions paid into spouses or family members’ registered pension schemes cannot be used to obtain any tax or national insurance contribution advantages.” This will prevent the diversion of employer pension contributions into spouses or family member’s pension funds. This practice isn’t especially widespread, but is indicative of the mindset of government and HMRC towards pensions.
Get stuck in
Despite future uncertainties, pensions remain a worthwhile tax break – particularly for additional rate taxpayers. As such, before income tax drops to 45 per cent in April 2013, additional rate taxpayers should load up their pensions pots. Steve Latto, head of pensions at Alliance Trust Savings, expects a pensions contribution boom over the next 12 months for 50 per cent rate taxpayers: “As the annual allowance for pensions remains untouched, a 50 per cent rate taxpayer could make a gross contribution of £50,000 with a net effective cost to them of only £25,000. From April 2013, the same contribution would have a net effective cost of £27,500. With the ‘carry forward’ rules remaining intact an individual could make a £200,000 gross contribution at net effective cost of £100,000 now.”
Elmer Doonan, partner at SNR Denton thinks “taxpayers may have been reprieved this year, but could find the relief on pension contributions is curtailed in the future, so they should consider utilising the annual allowances to the maximum while they can.” Currently, 50p taxpayers paying £40,000 into their pension pot get £10,000 added by the government and can claim a further £15,000 relief through ticking a box on their self-assessment tax form (amazingly some high rate taxpayers neglect to do this). But it’s not too late to make use of unused allowances from previous years – as Dominic O’Connell, head of tax, trust and estate planning at Coutts notes: “Some taxpayers may be able to re-coup tax relief from three years ago, offering relief on contributions of up to £200,000.”
There are likely many people with money to claim this back. As James Sumpter, financial planning director of Bestinvest explains: “Those who earned over £150,000 in 2009/10 and 2010/11 were restricted to a maximum contribution of £20,000-£30,000, so many will have unused allowance if they did not make a large contribution in 2011/12 that used this up” (see table). As such, Sumpter explains that “for 2012/13 an individual could contribute £50,000 plus £60,000 of carry forward allowance giving a total of £110,000, although they would need income in excess of £260,000 to get 50 per cent tax relief on the entire contribution.”
Politics and pensions don’t mix. The solution to future meddling is to separate the two. Even if this government pledged to keep things constant the next government could tear up the rulebook again. Raj Mody, who is partner and head of PwC’s pensions group thinks “what we really need to see is a stronger commitment from government to a long-term stable framework for pensions tax, possibly supervised by an independent commission, so pensions aren’t subject to short-term political interference.” Quangos aren’t the flavour of the month, but at least in this instance, the separation of power from the executive makes a lot of sense.