Bill Longe: What if pensions tax relief was scrapped?

Longe Bill- Baker Tilly-pensions-2015

“When you see someone putting on his big boots, you can be pretty sure that an adventure is going to happen.” AA Milne, Winnie-the-Pooh.  

Another Budget and yet more changes to pensions tax relief. Coupled with the announcement of further consultation on the subject, it is not difficult to reach a conclusion that pensions tax relief is destined to share the same fate as the dodo. So what will it mean for employers if the relief is scrapped?

The current system allows employers and employees to save into a special pot to provide for the employee in his/her old age. For every £1 the employee pays into the pot, the government adds a further 25p, 67p or 81p, depending on the employee’s rate of tax. 

The annual cost of the government contributions has reached £50bn a year, including £15bn of employer national insurance (NI) contributions savings on employer contributions to employee pension pots. Not surprisingly, successive governments have sought to curtail the costs.

The chancellor used his summer Budget to put on his big boots and announce the consultation highlighting potential changes to tax relief, which could bring pensions closer in line with individual savings accounts (Isas).

In short, pensions could in future be taxed like Isas, with savings funded out of taxed income and withdrawals being completely free of tax. Such an overhaul would bring with it numerous challenges for all employers, including ensuring the £15bn of NI savings that employers receive is preserved as far as possible.

Salary sacrifice arrangements would also no longer be effective, so the current savings from such schemes could be lost altogether.

Another challenge would be explaining to employees why pensions pots are not being increased by the government contributions, or indeed, why take-home pay is reduced because they are no longer entitled to tax relief in the payroll. 

Furthermore, local authorities and other employers that continue to operate defined benefit schemes will find the impact of any changes in tax relief mind-boggling, so much so that they will have little choice but to close the scheme altogether.

There is little doubt the latest announcements will mean that we are all about to embark on yet another pensions adventure, but employers will need to be careful they do not end up paying for it.

Bill Longe is a partner at Baker Tilly