If you’ve been tuned out of the political narrative over the summer, you might not have heard the government is facing a £22 billion black hole in its finances and a ‘painful’ Budget lies ahead. Then again, if you’ve got a smart phone, you’re probably up to speed.

There is plenty of speculation flying around about the taxes Labour are going to hike, especially after Keir Starmer said the heaviest burden will fall on those with the ‘broadest shoulders’. One of the rumours doing the rounds is that the chancellor will axe higher rate tax relief on pension contributions.

Currently pension contributions receive tax relief in line with the rate of tax you pay. So basic rate taxpayers ger 20% relief, higher rate taxpayers get 40% relief and additional rate taxpayers get 45% relief. It’s a generous arrangement for sure and costs the Treasury around £40 billion a year. Given the pressure on the public finances, there is now speculation this could be scaled back. Possible alternatives include restricting everyone to basic rate tax relief, or more generously, restricting everyone to a flat rate of tax of perhaps 30%.

WHAT IF THERE ARE CHANGES?

If this comes to pass, basic rate taxpayers would be in the same situation, or possibly better, but it would be a blow to higher rate taxpayers. It’s important to acknowledge that not all the rumours doing the rounds will translate into reality, and pensions tax relief is a particularly thorny nettle for the new chancellor to grasp. The way defined benefit pension schemes work makes it extremely challenging to divorce levels of tax relief from the tax rate paid by members. Raiding pensions isn’t a good look for politicians either. Gordon Brown is still lambasted for removing the dividend tax credit from pensions in his first Budget back in 1997.

The Labour government has also committed to a review of the pensions system, so it would be a bit odd if Rachel Reeves jumped the gun and axed higher rate tax relief before that was completed. Stranger things have happened of course, and given the pressure on public finances, it’s within the bounds of possibility that pensions tax relief might find itself in the chancellor’s crosshairs come October. We’ve got a new government, who were pretty tight lipped in the election campaign, so there is a sense of the unknown in terms of policy direction.

WHEN MIGHT CHANGES HAPPEN?

Many people will no doubt be thinking of making pension contributions before the Budget, in case higher rate tax relief does get the chop. It’s worth bearing in mind that even if Rachel Reeves announces restrictions on pensions tax relief in October, they may not come in immediately. The tax year runs from 6 April to 5 April, so it would make more sense to bring in any changes from the start of a new tax year.

Otherwise, it would be pretty unfair to those who chose to contribute to their pension in the second half of the current tax year, compared to the early birds doing so in the first half. It would also create mayhem in the workplace pensions world, where higher rate tax relief is baked into the collection of pension contributions.

For higher rate taxpayers who want to take a belt and braces approach, it might make sense to bring forward any pension contributions they’re making this tax year to before 30 October, just in case. Ultimately you’re just bringing these forward by a few months. In terms of bringing forward pension contributions from future years, you would need to consider whether you can afford to make them, and whether you might need access to that money before you draw on your pension. As things stand the minimum age at which you can gain access to your pension is 55, and that is rising to 57 in 2028.

DON’T OVERDO IT

It’s also important not to overdo it. You may end up costing yourself higher rate tax relief if you do. Most people have an annual pension allowance of £60,000 a year. But you will only get higher rate tax relief up to the amount of higher rate tax you have paid. So, in a simplified example, if you earn £80,270 per annum and have no other income, you currently pay tax on the £30,000 of your salary above the higher rate tax threshold, which is £50,270. Consequently, if you make a £60,000 pension contribution, you will only be eligible for higher rate tax relief on £30,000 of that contribution. The remainder will only attract basic rate relief.

The uncertainty caused by Budgets aren’t helpful for financial planning, so we should probably be grateful that Rachel Reeves has committed to holding only one big fiscal event each year.  It’s also worth mentioning that there has been speculation that other elements of the pension system might be tweaked, like lowering the annual allowance, reducing the amount of tax-free cash pension savers can take, and applying inheritance tax to pensions on death.

It’s almost certain that Rachel Reeves hasn’t decided on any of these policies yet, so to a certain extent, all of this is hot air. That won’t stop some people taking action before 30 October, though it’s probably a good idea not to perform too many contortions in order to avoid something which may not even happen.

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