As the Autumn Budget approaches, speculation is mounting around how Chancellor Rachel Reeves might address the UK's fiscal challenges. With a reported £40 billion shortfall and limited room to manoeuvre, pensions - particularly tax relief on contributions - could be in the firing line.
For SIPP and SSAS members, understanding the potential changes is crucial. In this first part of our series, we explore what might happen to pension tax relief and how it could affect your retirement planning.
How Pension Tax Relief Works Today
Currently, pension contributions benefit from generous tax relief:
- Basic-rate taxpayers receive 20% relief.
- Higher-rate taxpayers can claim up to 40%.
- Additional-rate taxpayers may receive 45%.
This means that for every £1,000 contributed to a pension, the government adds £250 for a basic-rate taxpayer, and higher earners can claim even more through self-assessment.
For SSAS members and business owners, employer contributions are also tax-deductible and exempt from National Insurance - making them a powerful planning tool.
What Might Change?
One widely discussed reform is the introduction of a flat-rate tax relief, potentially set at 30%. While this could simplify the system, it would significantly reduce the benefit for higher earners.
Example: Comparing Relief Models
Let's compare two individuals contributing £60,000 to their pensions:
| Earner type | Current relief | Flat-rate relief | Difference |
|---|---|---|---|
| Basic rate (20%) | £15,000 | £18,000 | +£3,000 |
| Higher rate (40%) | £24,000 | £18,000 | -£6,000 |
| Additional rate (45%) | £27,000 | £18,000 | -£9,000 |
While basic-rate taxpayers would benefit, higher earners—who often use SIPPs and SSASs for strategic planning - could lose thousands in annual relief.
Salary Sacrifice Under Scrutiny
Another area under review is salary sacrifice, where employees exchange part of their salary for pension contributions, saving both income tax and National Insurance. If the Chancellor decides to apply NI to these contributions, it could reduce the appeal of this strategy for both employers and employees.
What Should You Do Now?
While no changes have been confirmed, it's wise to:
- Review your contribution strategy - especially if you're a higher earner.
- Maximise current reliefs before any reforms take effect.
- Speak to your adviser about how your SIPP or SSAS could be impacted.
At Morgan Lloyd, we're here to help you navigate these changes and make informed decisions about your pension planning.
The information above is based on our understanding of the legislation applicable to UK Registered Pension Schemes, and HM Revenue & Customs rules. It is provided as a summary only and should not be taken as advice - Morgan Lloyd SIPP Services Ltd and Morgan Lloyd Administration Ltd are not authorised to give financial advice and will not be responsible for any decision or action taken as a result of relying on this information. If you are a retail client you should seek financial advice from a financial adviser who is authorised by the Financial Conduct Authority and/or seek guidance from the Government’s Pension Wise service.
