Annual pension allowance reduced in Budget?

The UK has been facing the reality of an ageing population for the last few years, but is the government fully prepared? On Monday 29 October the Budget seems set to announce a reduction in the annual allowance for pension contributions. The allowance is estimated to decrease from £40,000 to £30-35,000.

David Fort, managing director at Haines Watts Manchester, said: “Whilst, politically, this is an easy hit, it does affect many of our clients and contributes to a lack of consistency across the pension regime.”

The short-term impact of this change may not necessarily be enough to warrant widespread concern, but long-term this could present further challenges, Haines Watts has discovered.

“With an ageing society and ever-increasing life expectancy, the government should be encouraging people to own and contribute to their personal pensions in whatever ways they can,” Fort added. “I am encouraging my clients to make contributions ahead of the Budget if at all possible.”

The chancellor has faced increasing pressure to tackle the issue of high tax relief for pensions, an area that has arguably allowed for large discrepancies. There has been speculation that the chancellor could introduce a flat rate, rather than scrapping the scheme altogether – either way, each option would be controversial. One of the easiest ways for the divide to be further restricted – a way that would be less extreme – would be to lower the annual allowance, rather than axing tax relief rates.

With increased investment promised to the likes of the NHS, the cuts need to come from somewhere. As Haines Watts has outlined, however, further restricting pensions is an option that may have negative long-term consequences.

When considering what he would like to see in the Budget, David Fort admits that he is “also interested to see if electric cars will be mentioned, in relation to ‘benefits in kind’”.

He continued: “With the rise in companies wanting to be increasingly environmentally conscious, more and more of our clients are looking to invest in electric cars as their company vehicles. However, since 2016, the tax required on these fringe benefits has increased from 6% to 13% in 2018.”

In July 2018, the government announced the Road to Zero Strategy, the idea that 50% of new car sales will be cars with low emissions or electrically-powered by 2030. The government also committed investing in the process substantially by 2020 – adding this onto the promises made to the NHS, it becomes more understandable why other sectors are facing bigger restrictions and cuts.

Furthermore, in 2020, “11 new bands [are] being introduced for low emission cars,” Fort said. “Clients are normally looking to purchase cars on a lease of at least a few years, so it is difficult to advise on the decision of an electric vehicle as the benefit in kind tax continues to fluctuate. More consistent support from the government in this area would make these forward-looking decisions significantly easier.”

It is clear that the government is making inroads into developments in this area, but more could be done. The Budget would be  an ideal opportunity for some further decisions to be announced in this area.

When considering a final plea as to what should be included in the Autumn Budget, Fort said: “Additional support for R&D relief would also benefit the UK business industry. This tax relief is very useful for several my clients, encouraging them to look forward and invest in their future. I would love to see support for this continue to grow.”

With under a week to go until the Budget is announced, it will be very interesting to see whether any of these predictions are included.