Tax breaks on pension savings are meant to incentivise people to save throughout their lifetime so they aren’t dependent on the state during retirement. Unfortunately, with the economy in need of recovery after the coronavirus outbreak, tax relief has come under fire.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Here are other tax breaks that might be on the chopping block…
Lifetime allowance
There is a pretty good chance that there will be further cuts to lifetime allowance, which dictates how much you can save and ultimately hold in your pension pot before you’re subject to taxation.
The threshold has been reduced over the years and this year, Chancellor Rishi Sunak froze the current allowance at £1.073m and will remain frozen for the next five years.
The threat to lifetime allowance levels is not just prevalent for high earners anymore – people who have worked hard and have been focussing on saving more towards their pension are at risk of exceeding their threshold.
Annual allowance
There is a chance of additional cuts to annual allowance – the maximum you can put in your pension pot each year before tax applies. Currently at £40,000, the chancellor might cut this to £35,000, or even £30,000, which is a significant drop from £255,000 just a decade ago. For high earning doctors and dentists, other considerations, such as the tapered allowance reduce your allowance to just £4,000 in certain circumstances.
Public sector workers, including doctors, won’t be happy with more changes to the annual allowance, so the chancellor is reluctant to do so as we are all reliant on the work of those in the healthcare industry and that reliance has increased in the wake of COVID-19.
If you haven’t reached your maximum allowance over the last few years, be sure to use the carry forward option to avoid breaching the threshold.
High earners tax relief
As it stands, you get tax relief on what you pay in at your marginal rate when you contribute to a pension, which means that a higher-rate taxpayer gets the same level of relief on their contributions.
It’s possible that if the chancellor wanted to create serious savings, he could do away with the tax perks of wealthier taxpayers and level the playing field with all other earners in terms of tax relief. But this would create lots of complications and would take a long time and additional legislation to put into practice.
If you’re worried about this affecting you as a higher- or additional-rate taxpayer and you have the means to do so, maximise your pension contributions before the announcement is made in the next budget.
Death benefits
According to financial experts, the chancellor might consider reversing the 2015 changes to pensions that made them more attractive for those who want to prevent their savings from being included in the inheritance tax net.
Since the changes, you’re able to pass on funds in a defined contribution pension tax-free to your beneficiaries if you die before age 75. If you pass after that, your beneficiaries will need to pay tax on their inheritance. This could all change as stopping a special tax relief for unspent pensions could be easy money. It would, however, be difficult to legislate.
If this comes to fruition, revisit your financial affairs to determine which assets you can use during retirement as income, and which are best used for estate planning.
Work with your independent financial adviser
No matter what changes to tax relief are coming our way, there’s no doubt that change is on the horizon. To get ahead of potential hits to your pension savings plan, get in touch with us today.
Need help with your pension?
Investments | Financial Planning | Retirement | Save Tax | Protection |
Dental & Medical Financial Services have been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.