Speaking in June of this year, the UK Prime Minister promised the NHS in England a 70th “birthday present”, consisting of an extra £20bn yearly funding by 2023. With an extra £20bn to find, it bodes the question of where this funding will come from. In a 19 page-long paper, Royal London predict that the UK Government will most likely look to reduce Pension Tax Relief to raise the necessary funding and with the 2018 Autumn budget looming, the mutual insurer predicts that this change will occur sooner rather than later.

According to Royal London, an estimated £25bn of the UK Governments budget was spent on pension tax relief in the 2016/17 tax year – a figure Chancellor of the Exchequer Philip Hammond described as ‘eye-wateringly expensive’ in a recent speech.  The main prediction from the paper is that the limit on the amount that can be contributed into pension in a single tax year (a.k.a. Annual Allowance) would be reduced from £40,000 to £35,000 or £30,000. This would result in higher earners losing up to £4,000 worth of tax relief each.

In addition to the Annual Allowance cuts, there is a high probability that the Tapered Annual Allowance would be reduced from £150,000 to £125,000. The Tapered Annual Allowance applies to high earners and means that for every £2 of income over £150,000, £1 of a person’s Annual Allowance is lost- in this instance “income” includes, salary, dividends, interest, rent and much more.   Since its introduction in April 2016, it is estimated that the change has raised nearly £1bn funds per annum. As you can see, cutting would result in increases to Government savings.

The paper also alludes to other options the Chancellor could consider (i.e. Cut to Money purchase Annual Allowance; reduction in Lifetime Allowance; new caps to Tax Free Cash lump sums) but notes that due to potential political backlash, previous mandate statements and costs of such radical reforms, such drastic changes would be unlikely in the short-term.

It is more than likely that the potential announcement to reduce the Annual Allowance will come into effect in the new tax year however, it is not unheard of for such announcements to come into force immediately. Bearing this in mind, it is imperative that individuals make use of their Annual Allowances prior to 29th October to ensure they do not miss out on tax relief.

Should you wish to contribute or check that you have made sufficient pension contributions in this tax year then please get in touch with your Financial Adviser here at MPA Financial Management and we would be happy to assist.

For more information on this topic please email Joe McGovern at j.mcgovern@www.mpafm.co.uk or should you wish to contact your Adviser please call on 01564 795 997.