Tax on pensions – what does Labour have planned?
George Osborne announced a number of changes to the pensions regime in his budget speech. However the General Election is only weeks away and if Labour forms the next government they have some further changes planned.
The Labour Party wants to reduce university tuition fees and Ed Miliband announced recently that they plan to pay for this by cutting tax relief on pensions in three different ways. The Conservatives beat Labour to it and reduced the pensions lifetime allowance to £1 million but Ed Miliband has a further two changes up his sleeve:
1. Restricting tax relief on pension contributions for additional rate taxpayers
Currently when an individual makes a personal pension contribution the government pays the basic rate tax on this contribution into their pension pot. In addition, higher and additional rate taxpayers obtain a further 20% or 25% tax relief respectively through their tax return.
Labour is planning to limit tax relief to 20% for additional rate taxpayers (those with incomes over £150,000). So a contribution of £10,000 would cost £8,000 instead of £5,500.
There are currently no plans to limit tax relief for basic or higher rate taxpayers.
2. Reduction to the pensions annual allowance
| || Cost of £10,000 contribution now|| Cost of £10,000 contribution under Labour's proposals |
Basic rate taxpayer
| £8000|| £8000|
Higher rater taxpayer (income over £41,865)
| £6000|| £6000|
Additional rate taxpayer (income over £150,000)
| £5500|| £8000|
Labour has also indicated that it will reduce the pensions annual allowance from £40,000 to £30,000. This is the maximum gross pension contribution that an individual can make per year, including contributions made by their employer. We don’t yet know whether Labour would make any changes to the ability to use unused annual allowances from the three previous tax years.
What else might change for pensions?
The Conservatives have introduced some radical reforms to tax on pensions in the last few years. There have been no announcements as of yet but if Labour forms the next government it is possible that some of these reforms could be reversed. Information on these pensions reforms is in our previous articles:
All of this reinforces how difficult it is to pension plan for the future.
What other changes does Labour have planned?
50p top rate of income tax to return
Labour plan to reintroduce the 50% top rate of income tax for earnings over £150,000. This was first introduced by the previous Labour government in April 2010 but then cut to 45% by the Conservatives in April 2013. For an individual with earnings of £160,000 this would mean an increase in their tax bill of £500 a year. For an individual earning £200,000 the increase would be £2,500 a year.
Although it is unlikely that an increase in the tax rate will happen during 2015/16; we would expect it to be effective from 6 April 2016, it is possible. Therefore, for those with taxable incomes over £150,000, accelerating dividends before 5 April 2015 could ensure you are not caught by a potential increase in the tax rates.
10p starting rate of tax in, married couples allowance out
Labour wants to reintroduce the lower 10% starting rate of tax. This existed in the UK from 1999 to 2007 and in fact still exists today, but only in in respect of savings income (individuals with non-savings income in excess of £12,880 in 2014/15 don’t benefit).
Labour haven’t said what level of income the 10% rate would apply to but they have said that higher rate tax payers won’t benefit as the level of income at which the 40% rate of income tax starts to be applied will be reduced to compensate. If the 10% rate was applied to the first £2,880 of an individual’s income as it currently is to savings income then a basic rate taxpayer would be £288 a year better off.
Labour plan to pay for the 10p rate in part by scrapping the marriage allowance set to be introduced this April. For further details on the marriage allowance please see:
Mansion Tax on properties worth over £2m
Labour plan to introduce a Mansion Tax on high-value properties worth over £2m. Like council tax, properties would be put into bands, with all properties in a given band liable for the same tax. Labour have indicated that properties worth between £2m and £3m would be charged £3,000 per year, with a series of higher bands for properties above £3m attracting successively more tax. Labour has also advised that overseas owners of second homes will be expected to make a larger contribution than people living in their only home.
Reduction to entrepreneurs’ relief limit?
It is estimated that entrepreneurs’ relief costs the exchequer around £3bn a year and it is therefore unsurprising that the Conservatives have been tightening the rules in this area in recent months. It has also come under scrutiny from opposition politicians.
Whilst it seems unlikely (although we obviously do not know at this stage) that Labour would abolish entrepreneurs’ relief altogether it is a distinct possibility that they could seek to reduce the amount of available relief or further tighten the eligibility criteria in some way. Labour might, for instance, reduce the lifetime limit from £10m down to £5m.
It will be a case of wait and see in respect of entrepreneurs’ relief, unless the political parties make any specific announcements prior to the election. Those in the process of selling their businesses may wish to accelerate deals where possible.
When could the changes take place?
We know that after the last election in 2010 an emergency budget was called around six weeks later. The General Election is set to take place on 7 May 2015 and therefore if there is a change in government we can expect a further Budget to take place sometime in June 2015. Some changes would likely be brought in straight away whilst others would likely be delayed until the next tax year after 5 April 2016.