Taylor Wessing partner Rosalind Connor comments on the pensions green paper announced in today's budget.
"The new green paper on pensions announced in today's budget suggests a significant rethink of the taxation of pensions. Whilst the paper is clear that it may be best to leave things as they are, the other proposal mentioned is the idea of taxation at the beginning, rather than the end of the pension process. At present, pensions are taxed at the time they are taken, as income, and are tax free both on contributions and fund growth. The paper suggests the idea of taxation on contributions, but not on growth or on receipt, which is more in keeping with the treatment of ISAs.
"Of course, this would accelerate tax receipts, rather as the 'freedom and choice' changes that came in this April are doing, which has obvious advantages for the Treasury. However, whether this is enough to overcome the various concerns hinted at in the paper and others, such as the challenges this causes for pensions administrators who have had a lot of change to deal with recently, remains to be seen.
"The budget paper refers to the now popular practice of salary sacrifice, by which employees agree to a lower salary, and the employer agrees in return to pay that amount of reduction into the pension scheme. Because the salary is lower, NICs are lower. The process is acknowledged and regulated by HMRC and is increasingly being taken up by employers, as a process that saves them and their employees NICs. The paper states that the government will 'actively monitor' salary sacrifice, suggesting that it is a process at risk of attack in future budgets. In an era in which large numbers of legitimate tax planning schemes are challenged in any event, it is unsurprising to see this process being put under scrutiny and it is clearly a tax planning activity which no doubt reduces HMRC receipts.
"The budget has, as expected, reduced the annual allowance for additional rate tax payers in order to pay for the changes to inheritance tax. It seems unlikely that those tax payers will make higher contributions than the limit, and pay the annual allowance charge, so the most likely effect of this change is a reduction in pensions savings amongst the wealthiest taxpayers. Of course, it will cause significant challenges for defined benefit pension schemes, which will find charges arising for better paid employees if they continue to accrued significant benefits in their pension scheme."