Possible changes to pensions tax relief

In its election manifesto, the Conservative government promised to amend the current pension tax relief rules for the UK's highest earners (those earning more than £150,000 per annum). This promise could be kept as early as the emergency summer budget on 8th July 2015.

Under the manifesto plans, the annual allowance would gradually taper away from £40,000 to £10,000 for those on annual salaries of £150,000 or more. So if this promise is kept, the very highest earners could see their tax relief on a full annual pension contribution fall from £18,000 to £4,500.

Sometimes changes announced in a Budget can take place with immediate effect, so if you are an additional rate tax payer who would like to make the most of the pensions tax relief currently available, before any possible changes take place, you should act now. To maximise contributions, some high earners could also carry forward any unused allowance from the last three tax years.

Please note that if you wish to contribute to your pension before the Budget, Cofunds' deadline for completed paperwork is Tuesday 30th June 2015. Please complete our quick, online questionnaire and we will send you some more information.

In addition, the possibility that there will be a ban on the creation of new salary sacrifice schemes has been mooted. Salary sacrifice is when employees can decide to take less of their take-home pay and instead put the money into their pension scheme or other benefits such as childcare vouchers. By doing this, both the employer and employee pay less in national insurance contributions. Low and middle earners save the 12% that they would otherwise pay in national insurance on the income they have sacrificed. It's not quite so beneficial for higher-rate tax payers because the national insurance contributions fall to just 2% once wages go over the higher-rate threshold (currently £42,385). Employers save 13.8%.

The government currently loses approximately £5 billion a year in national insurance contributions from these schemes. The more popular the schemes get, the more the government will lose and, as austerity is still paramount for the Chancellor, it is possible he may decide enough is enough and call a day on the practice.

Advice and guidance

Chelsea is an execution-only business and cannot give advice. If you feel you need advice on your pension, you should consult a financial adviser. Alternatively, the government has launched an impartial guidance service called Pensionwise (www.pensionwise.gov.uk).

You can also get a state pension forecast from www.gov.uk/state-pension-statement.