Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The Budget earlier this month included measures to freeze some tax allowances, but large reforms to the system were largely resisted.
Industry-watchers knew, however, that the Budget was not the only opportunity the Government had to tinker with taxes. ‘Tax Day’ is scheduled for Tuesday this week and is when the Government will announce any proposals it has to alter the tax regime. Any big changes that come in the future are likely to be aired on Tax Day first.
News reports in the past week have suggested that Tax Day could include various measures affecting individuals. They include potentially making the Inheritance Tax system simper for families by removing bureaucracy, as well as making the system for self-employed taxes more digital and look more like the system for employees.
Grabbing most attention, however, is the rumour that pension tax relief could be in line for an overhaul.
At the moment, pension tax relief means that contributions are helped by money that would otherwise have gone to the tax man. A boost equivalent to any basic-rate tax paid is automatic, while the extra available to higher and additional rate payers is either added automatically or else claimed through a self-assessment tax return. Contributions are allowed to build tax-free and then 25% of the pot can be taken with no tax due and income tax payable on the rest.
A good way to look at it is that it costs a basic-rate payer £80 to make a £100 pension contribution under the current rules, while a higher-rate taxpayer pays just £60 for the same effect and an additional-rate taxpayer £55.
From a tax point of view, all this makes a pension potentially the most advantageous place to save and invest your money. The biggest relative benefit comes for those whose income in retirement puts them in a lower tax band than was the case during their working life and, because the system is linked to the income tax you pay, it is more generous overall to higher earners.
That could make it an attractive target for a Chancellor looking to raise money, and it has the added appeal that the people benefiting the most currently are rich by most standards so any windfall for the Treasury could be refocused to help younger people and lower earners.
The Government has previously consulted on whether the system of tax relief is working properly - but has rejected the change as too disruptive. A further sticking point for reform is that the large amount of relief that goes to public sector workers. Some industry figures have suggested most of the cost of pension tax relief comes not from higher earners paying into defined contribution pensions, such as Workplace pension and SIPPs (Self-invested-personal pensions), but from the relief claimed by Defined Benefit schemes where retirement income is linked to the level of salary pre-retirement. That includes groups like the NHS workers and the Police.
If any news does arrive on Pension Tax Relief, it is likely to be only of a consultation into possible changes - reforms would still face several hurdles before coming into force. Yet it still makes sense for higher-rate tax payers to review their pension contributions to ensure they make the most of the system as it stands.
Those saving into a workplace scheme should ensure they are maximising any matched pension contributions from their employer. This may require contributing more than the default minimum into their scheme. If you have maximised the help on offer for a work scheme, a SIPP can allow you to take further advantage of the tax breaks on pension saving.
Bear in mind that tax relief on contributions to a pension are restricted by the amount you earn and the Annual Allowance (currently £40,000 for most people) for pension saving. Very high earners may be subject to an even lower limit via the Tapered Annual Allowance. Anyone who has taken taxable income from their pension may also be subject to a lower limit under the Money Purchase Annual Allowance. The Lifetime Allowance (currently £1,055,000) also restricts how much you can build up in pension benefits before a tax charge may apply.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.