UK: The Budget Comes But Twice A Year

Last Updated: 22 July 2015
Article by Elmer Doonan, Jay Doraisamy, Andrew Patten and James Borshell

One joy of UK Parliamentary democracy is watching the annual budget with its howling Government MPs, roaring Opposition MPs and ritual interventions of the Deputy Speaker to allow the Chancellor to finish off his speech.

On 8 July the Government doubled down on budgets for the year. In between making the Secretary of State for Work and Pensions happy with a living wage announcement and mocking Boris Johnson's opposition to Heathrow's expansion, the Chancellor put forward a consultation that could lead to some radical change to pensions taxation in the future.

The announcements

Much of the "bread and butter" proposals for pensions were unsurprising and had been flagged by the Government previously:

  • The annual allowance (the amount a person can save with tax privileges towards their retirement in any given year) will be tapered for high earners.
    • Anyone with total earnings (including their pension savings in that period) of £150,000 or more will have the standard £40,000 allowance tapered away. There will be a £1 reduction in the allowance for every £2 over £150,000 they earn or pay into their pension. The taper is capped at an income of £210,000 combined earnings and pensions saving with a fixed annual allowance of £10,000.
    • The taper will not apply to a person who has earnings of £110,000 or less, even if they are paying more than £40,000 into their pension (though. of course, that is the annual allowance!).
    • However, a high earner trying to dodge this taper by entering a salary sacrifice arrangement to increase pension contributions whilst reducing their earnings below £110,000 will trigger anti-avoidance powers.
    • Administratively all pension input periods have closed with effect from 8 July 2015, and the Government will be putting in place transitional reliefs.
  • The Government's plans to implement its 'sell your annuity' framework will go ahead but in 2017 rather than 2016.
  • The Government will tax inherited pension benefits after a member's death on or after their 75th birthday at the recipient's marginal income tax rate rather than the current punitive rate.
  • The lifetime allowance (the amount a person can save with tax relief for their retirement across their lifetime) will reduce to £1,000,000. This will add yet another layer of transitional protections to cover anyone prudent enough to have already saved more than this amount.

The consultations

In the "lesser" of the two consultations, the Government confirmed that it will consult on the use ofunfunded EFRBS for tax avoidance, with an aim to removing this tax planning choice.

The real "sting in the tail" is the second consultation. The Treasury has already started consulting on whether it should reform the current system of pensions tax relief.

The main difference between the tax treatment of ISAs and pensions is when you pay tax. For ISAs taxed income goes in, tax-free income comes out. For pensions tax-relieved contributions go in, taxed income (subject to the option to take a 25% tax-free lump sum) comes out. In both cases investment returns are not taxed.

One of the options the Government is considering is to tax ISAs and Pensions as income in, untaxed income out products. This seems to be based on some comments from the Pensions Minister before she was appointed, and a paper from the Centre for Policy Studies (CPS) proposing a "workplace ISA" style saving product. The CPS paper suggested that this could replace existing occupational pensions savings. It also dangled up to £10 billion of front-loaded taxes in front of the Treasury.

The Treasury's consultation is considering this and any other options put forward by the industry to address the most obvious problems with the current system. For example, pensions tax relief is weighted heavily towards high earners whilst tax relief on contributions is also "invisible" and takes a lot of explaining.

Comments

The Treasury stresses in its consultation that the current system may well be the best structure to get people to save, although it acknowledges this might not necessarily be the case. We agree that this is an area to explore. There is little point in maintaining the status quo if it does not meet the objective of producing decent retirement incomes for people.

The current system has advantages. For example, the "front loading" of tax relief on pension contributions means more money is available to generate investment returns, a key factor in good retirement outcomes. Current pensions legislation is also very good at forcing people to keep their savings in place till retirement which is otherwise an enormous temptation during difficult times. This is something that ISAs as a short to mid-term investment product are expressly designed not to do (and arguably what makes them popular to younger savers).

Also, that £10 billion of extra income to put towards the budget will be matched, and potentially exceeded, by tax income foregone on pensions income in retirement.

Of course, there are improvements to be made. Often these are "political" questions on where the Government should focus its incentives to save for retirement, but there is one legal area where it could do some good.

If the Government decides to keep the existing system, then it should leave it alone for a while. The continual paring away at the annual and lifetime allowances and tax relief tapers is turning the "simple" A-day system into a nightmare of transitional protections, tax traps and unintended consequences. Long-term saving needs settled rules, and tinkering around the edges merely complicates matters. The Government should either make the big changes to introduce "fairer" pension savings, or leave the existing system alone so that people understand what they can put into their pension from one year to the next.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions