MPAA consultation hints at future pension tax relief change

Wording in the consultation on the money purchase annual allowance (MPAA) is the “clearest indication” to date that Chancellor Philip Hammonds will act to change pension tax incentives, the industry has noted.

Within the document, a sentence reads: “The government is committed to enabling individuals to save more to that they have security in retirement, but it is important that resources focus where there is most need.”

It also mentioned that the cost of tax and National Insurance contributions relief on pension savings is one of the most expensive sets of relief offered by government. In 2014 to 2015 this cost around £48bn, with around two thirds of the tax relief going to higher and additional rate taxpayers. In 2014 to 2015, the government also collected around £13bn in tax from pensions in payment.

Therefore, Hargreaves Lansdown believes that there will be either a reduction or total removal of higher and additional rate tax relief, a move to a flat rate top up or the introduction of age related top ups, more heavily incentivising younger savers.

Commenting on this, Hargreaves Lansdown head of retirement policy Tom McPhail said: “George Osborne left unfinished business following his pension tax relief review last year. With the impending cost increases to the Treasury as a consequence of auto-enrolment, further reform was always a case of when rather than if; it now looks like it's going to be sooner rather than later.

“Higher earners in particular are now on borrowed time and would do well to make the most of the tax breaks while they still can,” he added.

Thomas Miller Investment private client partner Matthew Brown, also picked up on the wording, which he said contains a “pension bombshell”.

“Although skilfully nuanced in terms Sir Humphry Appleby could have been proud of, the message was plain for all to see. Whilst celebrating the success of auto-enrolment, they deliver a warning that will send a shiver down the spine of higher rate tax payers.

“A flat rate pension at 25 per cent or 33 per cent would help those the government considers most in need – the so called ‘just about managing’ by giving them extra incentives to save, albeit at the expense of higher rate taxpayers. Indeed, let us not forget that yesterday the government re-committed to taking swathes of taxpayers out of higher rate tax by rating the threshold to £50,000 by the end of the parliament, which will reinforce this belief."

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