Gazette Business
Crying wolf?
10:17am Friday 17th February 2012
BUDGET Day is March 21 and there is already speculation about what will be in it.
The main challenge facing the Chancellor is how to reduce the UK’s borrowings (now in excess of £1,000 billion and rising) without risking a further recession.
There is however another, very potent, challenge and that is a political one.
The recent publicity over bonuses in the banking sector has shown just how strongly people feel about the need for perceived fairness. This makes me think that one story that the newspapers have run before every Budget that I can remember – and that is quite a few – may be about to have its day. The story is about higher rate tax relief on pension contributions.
A basic rate taxpayer contributing £800 to their pension fund receives – or rather their pension fund receives – a £200 top up from the government. Someone paying tax at 40% receives (in addition to the £200) a further £200 in tax relief.
A 50% taxpayer receives £300 tax relief on top of the £200. The different rates of tax relief have always been justified on the grounds that the rates at which relief is given when contributions are made reflect the rates at which the person will pay tax when they eventually draw the pension.
The pension industry doubtless smiles every time the story surfaces as it encourages people to make extra contributions “just in case”. But in the current political climate and with a coalition where there is clear pressure from the Liberal Democrats for visible fairness in the tax system I wonder whether the Treasury might be thinking that the time has come to restrict or even withdraw the higher rate relief.
According to the Chief Secretary to the Treasury the relief costs the Exchequer £7 billion a year, which must make it a very tempting target.
What should you do? Well, that depends to an extent on whether you think that the temptation will be too great for the Chancellor. But while the relief is there it represents a very effective way of saving tax at 40%, 50% or even 60%. And yes, there really is a 60% rate on income between £100,000 and £114,950.
Perhaps the press and pensions industry are just crying wolf again. But as I recall that story, just as everyone stopped believing it the wolf turned up.
Paul Aplin OBE is a tax partner with A C Mole & Sons and chairman of the Technical Committee of the Institute of Chartered Accountants in England & Wales Tax Faculty. He and Taunton based tax partner Amanda Gunter can be contacted on 01823-624450, Bridgwater based tax partner Paul Kingdom can be contacted on 01278-446088.