George Osborne announces the 2016 UK Budget on 16th March.
With the Budget looming, it’s that time of year when the pensions industry starts to speculate as to what might be announced within the Budget and the impact this will have, usually resulting in challenges – but also opportunities.
Here we detail seven items which have been proposed for the upcoming Budget and consider the impact of these, including important considerations for non-UK residents.
In the summer Budget last July, a consultation on wholesale changes to the pension system was proposed but the general feeling is that with the unprecedented changes which were introduced to the pension’s regime in 2015, the Brexit vote in the summer and a possible Conservative leadership battle, this Budget may contain fewer surprises.
Following on from the Budget, we will provide a detailed update to discuss and evaluate all of the changes which are likely to have an impact on the pensions industry.
1. Reduction of UK Lifetime Allowance
The UK Lifetime Allowance (“LTA”) is already set to reduce from £1.25 million to £1 million from 6th April 2016, but there are suggestions that this Budget might be used to announce plans to reduce this even further – with a figure of £750,000 mentioned as being consulted by Treasury.
The potential impact of any further reduction in the UK LTA is relevant for anyone with a reasonable amount of UK pension savings in either a defined contribution or defined benefits scheme.
With the UK LTA limit having been steadily reduced in recent years from its peak at £1.8 million in 2010 to at least £1 million from April 2016 and possibly reduced yet further – the overall number of individuals who may then be in breach of the LTA limit will be significantly higher.
This means a significant increase in UK tax take, with a 55% tax rate applied for any lump sum payments above your LTA and if the pension benefits are taken by way of a regular payment or cash withdrawal above your LTA, the tax rate is 25%. These tax rates are the same whether an individual is UK resident or non-UK resident.
Any individual, whether UK resident or non-UK resident, who has pension savings nearing the UK LTA limit or who has a number of years left before they intend to draw from their pension and is concerned their pension may ultimately exceed the LTA limit, should consider their options.
For example, Lifetime Allowance Protection may be available to certain qualifying individuals who have pension savings in excess of the reduced LTA limit. This LTA protection will enable an individual to effectively increase their lifetime allowance.
Transferring to a Qualifying Recognised Overseas Pension Scheme (‘QROPS’) might also be an option to consider for anyone who has permanently left the UK, or is intending on leaving the UK in the near future.
2. Reduction of Annual Allowance
The current annual limit on pension contributions is set at £40,000 – having once been as high as £255,000. The limit was reduced from £50,000 to £40,000 in 2014 and there are suggestions that this limit could be further reduced, with the amount being suggested varying from £25,000 to as little as £10,000 a year.
The impact of any such reduction for non-UK residents will vary and there are many issues to consider, such as whether the individual is considered a ‘relevant UK individual’ and whether they have relevant earnings subject to UK tax.
One important point to note is that should an annual allowance charge be due, this will apply regardless of the residence of the individual and will not be covered by any Double Taxation Agreement.
3. Annual Allowance Taper
The Government announced in the Summer Budget 2015 their intention to cut pensions tax relief for high earners by introducing a tapered annual allowance for anyone with an income in excess of £150,000.
The measure is set to take effect from 6th April 2016 and will restrict pensions tax relief for high earners by introducing a tapered reduction in the amount of the annual allowance for individuals with income (including the value of any pension contributions) of over £150,000 and who have an income (excluding pension contributions) in excess of £110,000.
4. Abolition of Tax Relief System
Arguably the most radical proposal which had been mooted was to establish a new system more akin to a UK Isa, where contributions would receive no tax relief but all of the money would eventually be withdrawn tax free. However it appears such a radical overhaul will not be made – at least not at the current time.
The obvious appeal of this system to the Treasury is that it would result in huge savings on the tax relief bill today, which it is suggested is as high as £50 billion per year when both tax and national insurance are taken into consideration.
The downsides to any such change of system would be the complications with managing a two pots pension system, the existing system with tax relief and the new proposed system without and also the overall impact this could have on discouraging long term savings generally.
Furthermore there are many who are less than convinced that future governments would honour the position and agree to allow all future pension benefits to be paid without the deduction of any tax.
5. Flat rate of Tax Relief
Another proposal is to keep the existing structure but to remove the tax relief tiers, which is highly advantageous for higher rate taxpayers and introduce a single flat rate of tax – the suggestion being that this would result in a higher amount for basic rate taxpayers and a lower amount for higher rate taxpayers.
Higher rate tax relief costs the Treasury £7 billion a year and clearly favours the well-off, so a move towards a flat rate of tax relief has been proposed as a realistic measure which would be beneficial to the majority of workers and would save the government money.
6. Abolition of Salary Sacrifice Schemes
One of the less publicised suggestions has been the proposed abolition of “salary sacrifice” schemes, which are viewed by many as a loophole and which cost the Treasury a significant amount of revenue.
Essentially a salary sacrifice scheme allows an employee to take a smaller salary, in return for increased benefits, including pension contributions. This can result in the employee paying less income tax and the employer saving on National Insurance contributions – so a double whammy for the UK Government.
7. Abolition of personal allowance for non-UK residents
It was a surprise to many that the personal allowances were not removed last year and it remains an ever present possibility that for those who are not UK resident, a reduction or total removal of the personal allowances might occur.
Such action could have a significant impact for non-UK residents with UK source income, including UK pensions – although in part Double Taxation Agreements may provide some relief.