On 17 November, the Chancellor will deliver his fiscal statement (closely resembling a full Budget) and we will then learn, to use his own words, what “decisions of eye-watering difficulty”1he has taken.
As we approach a Budget, there’s always speculation about removal of marginal rate tax relief on pension savings. However, it is perhaps more credible this year than some others. When asked2in the House of Lords whether the Government might “look again at the question of higher rate tax relief and … whether significant savings might be made through that” the Government Lord responding to the question stated that “I am certain that the Chancellor and the Prime Minister will be looking at all aspects, and particularly in this respect”.
If there is fundamental change to tax relief on pension savings, such as restriction of relief to basic rate only, this would be unlikely to happen until at least 6 April 2023 as the systems and procedural changes necessary would be immense. However, it is likely that the Government would wish to deter individuals from bringing forward savings that attract marginal rate tax relief and could, in the meantime, introduce “anti-forestalling” provisions that had immediate effect.
Assuming that the Government wished to introduce such a deterrent, it already has a tried and tested methodology for this. In April 2009, the Government of the day announced plans to restrict tax relief on pension contributions for high earners (high income excess relief charge – HIERC). This had a two-year lead-in and, although the policy was subsequently derailed by the 2010 general election, anti-forestalling provisions were effective from April 2009 through until April 2011 when the (then) new Government implemented its alternative to HIERC, reducing the Annual Allowance (AA) from £255,000 to £50,000 (now £40,000).
Those anti-forestalling provisions took the form of a “Special Annual Allowance” (SAA)3, usually £20,000, which applied to individuals whose relevant income was at least £150,000. Pension input above the SAA was subject to a special charge (to be met by the individual, there was no “scheme pays” option), with the charge intended to recover relief given above the basic rate.
The purpose of the SAA was to deter additional savings and not to interfere where people continued with their regular pension savings. There was usually no charge on defined benefit accrual or on continued regular money purchase contributions, even if these exceeded £20,000. However, the lower pension input reduced the scope for additional pension saving within the SAA, potentially to nil. There was also no SAA charge where savings to defined contribution arrangements increased, but the increase had been agreed before the SAA was introduced4.
A similar approach could feature again, with the SAA set at whatever level the Government considered appropriate. The obvious attraction is that the legislation is tried and tested and, with some tweaks, could be rolled out again. Indeed, the population affected could be far larger than in 2009, for example if the Government chose to restrict tax relief to basic rate only, it might then apply anti-avoidance provisions to all higher-rate taxpayers, most of whom would typically be much less able to contribute large amounts than those in scope when the original SAA was in force (as they would be lower on the income distribution). Depending on the level of any SAA, some may still be able to increase their contributions meaningfully – just not always by as much as they might wish.
1 Chancellor’s statement 17 October 2022.
2 Lords debate 1 November 2022, Column 122.
3 Schedule 35 Finance Act 2009.
4 For more details see Pensions: Limiting Tax Relief for High Income Individuals.
