Looking Ahead series: Autumn Budget 2024 - article ten
If the abolition of the lifetime allowance (LTA) has taught anything, it’s that rushing big structural changes to the pensions tax system does not work well. While measures to raise revenue can sometimes ride roughshod over principles, the immense challenges of LTA abolition are at least fresh (ongoing!) in the minds of policy officials.
If the Budget announces that contributions will in future receive a flat rate of relief, or that deferred income will in future be taxed on the way into a pension rather than the way out, it is difficult to see how this could be implemented before the 2026/27 tax year at the earliest.
Simply announcing that sort of timetable could encourage “buy now while stocks last” behaviour, with higher earners who expected the new system to be less favourable contributing as much as possible before the change took effect.
To avoid a revenue strain in 2024/25 and 2025/26, the Government might need to introduce “anti-forestalling” measures, limiting people’s ability to pay additional contributions.
In 2009, the previous Labour Government announced plans to reduce tax relief on pension contributions for high earners through the High Income Excess Relief Charge (HIERC). This was not due to be implemented until April 2011 (by which time, the Coalition Government had abandoned the idea in favour of reducing the annual allowance (AA) from £255,000 to £50,000), but anti-forestalling measures were effective from April 2009.
These took the form of a “Special Annual Allowance” (SAA)[1], 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. There was also no SAA charge where savings to defined contribution arrangements increased, but the increase had been agreed before the SAA was introduced[2].
If the Government felt it necessary to protect against a run on pensions tax relief, 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. The SAA was complicated if it came into play, but it was an effective deterrent and, provided that individuals continued their existing pattern of savings, it was not intrusive. However, it previously applied to a much smaller population than those who would be affected by ending higher-rate relief.
