FINANCE COMMUNITY EXPERT: Claritas Wealth

The change to pensions that the government would love to make

by Tim Walsham, Claritas Wealth

There are lots of rumours flying around in relation to changes that Rachel Reeves may make to the tax system to top up the country’s coffers.

There’s the potential further restriction of the maximum lump sum that can be taken out of pensions.

Lots of talk as well about further changes to inheritance tax, including the lengthening the amount of time that it takes for a gift to fall out of your estate from 7 years to 10 years or longer.

Also the perennial discussion about capital gains tax and the disparity between the rates of tax paid on income and gains. Will they dare equalise income tax and capital gains tax rates? It would be a bold move. Who knows?

The change that the past few governments have been itching to make though is to amend the income tax (and National Insurance) relief system for pension contributions.

Pensions tax relief cost the government circa £52 billion in 2023/24 and over 60% of this relief was used to reduce higher rate (40%) or additional rate (45%) income tax bills.

I’m not saying that the government are looking to scrap pension tax relief completely. It’s really important to provide encouragement and incentives to save for the future in order to reduce reliance on the State.

I’d say that what they would love to do (but are scared to do so) is get rid of higher and additional rate pension tax relief.

Watch this space.