It is expected that the chancellor will announce in the Budget on the 16th March 2016 a flat rate tax relief on pension contributions. This has come under a lot of scrutiny from many financial professionals but is seen as the lesser of two evils when considered alongside a ‘Pension ISA’. The chancellor is considering a flat rate of between 20% and 33% which if set at 25% could have a major impact on those already in pension schemes/those planning their retirement investments.
For those who have workplace pensions with defined fixed pension contributions this could reduce their monthly take home pay.
As an example an individual on £60,000 salary, paying 5% into a defined fixed pension contribution would be paying in £3,000 to their pension. Under current legislation a higher rate tax payer would pay in £1,800 and the government would top up the contributions with £1,200 (tax refund into scheme).
However, if a flat rate of 25% was introduced using the same scenario above, the individual would be required to pay in £2,250 with the government only topping up the contributions with £750. This would leave the employee having to pay in the additional £450, which would be taken from their salary.
The below table shows how an individual paying 5% of gross salary into a defined fixed pension would be set to either lose or benefit: