The Chancellor reduces tax relief for high earners but opportunities remain for contributions made in the current tax year which are subject to an increased allowance.
Tax relief on pension contributions
In order to balance the books in the light of the main residence nil rate band (see related article), high earners are being hit with a reduction in the tax relief applicable to their pension contributions.
Currently, the most that can be contributed tax free to a pension by those earning over £150,000 (including pension contributions) is £40,000. From 6 April 2016, individuals whose income exceeds £150,000, the 45% tax bracket, will see the tax relief on pension contributions gradually reduced down to £10,000 via a sliding scale. For those with income of more than £210,000, tax relief will only be available on a contribution of up to £10,000.
However, there will be some scope for making additional contributions in the current tax year as the normal £40,000 allowance is being increased to £80,000. Individuals who are affected should take advice on this promptly.
Pension death benefits
Lump sum benefits paid out of pension schemes when somebody dies aged 75 or over are currently taxed at a flat rate of 45%. This will continue to be the case if the benefit is paid to a trust or company. However, if it is paid to an individual, tax will be payable at the individual’s marginal rate of income tax from 2016/17, which may be less than 45%. Although this is good news, flexi-access draw down may provide a better solution.