The chancellor will need to generate income, are pensions in the firing line?

Just a week after announcing that National Insurance contributions would be increased for the self-employed in his first (and last) Spring budget, Chancellor Phillip Hammond made a shock u-turn and scrapped that policy altogether.

While this news was welcomed by many, the question of how the government will make up for this lost revenue remains. Gary Smith, chartered financial planner at Tilney, looks at what may be in the firing line.

“The government has made a lot of promises in terms not raising taxes in certain areas – income tax, NIC and VAT are all untouchable, unless they renege on these promises. However, there is one area in which they have made no promises and therefore I believe pensions could be firmly in the firing line.

“An easy option for the government would be to reduce the annual allowance to £30,000 from its current level of £40,000. This will further hit those saving for retirement as they will either have to put less into their pension, or be hit with a higher tax charge. Those in defined benefit schemes may have little choice but to pay the higher charge, but those in more flexible schemes may want to look at alternative options, such as Isas, where you will now be able to save £20,000 tax free.

“The chancellor may also decide to scrap carry forward of pensions allowances. From this coming tax year, the amount you can carry forward has been reduced from £50,000 to £40,000, so there is every chance this will be reduced even further.

“Finally, the government could introduce a flat rate of pensions tax relief. This would help boost retirement savings for basic tax payers, while reducing the amount that higher and additional rate taxpayers currently receive. This would help encourage lower earners to save while the higher earners are unlikely to need help from the state anyway. However, middle earners would feel the hit on this policy.

“Ultimately, pensions are always going to be an easy hit as they are so complicated and few people fully understand them. I had anticipated that pensions tax relief would be attacked in the chancellor’s Autumn Budget even before the national insurance backtrack, so I now think the attack could be even harder. It is therefore more important than ever to ensure you have made full use of all your allowances this tax year and speak to your financial planner to ensure you are protected against any changes that may be coming.”