There is increasing conjecture that the Budget may alter the taxation of pensions.

Chancellor Rachel Reeves says she has to find £22 billion, and some experts suggest she may get part of this money by modifying the private or worker pension systems. This discussion is unrelated to another one on the state pension.

Numerous factors might impact those starting their first employment, those in the workforce, and those approaching retirement. Even if you're just in your 20s, you should still be concerned about what can happen.

 

National Insurance

National insurance (NI) is withheld from your pay and used by the government for public services and benefits. Your employer must also make a national insurance payment.

All contributions made to a pension, however, are exempt from NI and income tax.

Making companies contribute at least a portion of national insurance (NI) to employee pensions is one of the chancellor's options.

By doing this, the government could be able to generate billions of pounds right away.

Nevertheless, company owners may find themselves short on funds for investments and recruiting as a result of this additional expense. As a result, finding employment may grow more difficult.

Companies may also decide to cut back on pay increases for all of their employees or to stop funding new hires' pensions.

Alternatively, companies that presently take full advantage of the National Insurance benefit by pushing employees to accept a higher pension rather than a lower wage—a practice known as salary sacrifice—might be prevented from doing so.

Ms. Reeves finds this option appealing as it allows her to generate funds without significantly altering people's take-home pay.

The drawback is that companies are less motivated to contribute to their employees' pensions. This would imply that the pay of existing employees will decrease when they retire.

 

Rules on Inheritance

There are several guidelines when it comes to taking over a partner's or parent's estate upon death.

If an estate is worth at more than £325,000, inheritance tax is payable; however, funds invested in a pension do not contribute towards this amount.

Separately, any remaining pension funds that a person passes on before turning 75 can often be transferred tax-free as an income or lump payment.

Their pension money can still be bequeathed to someone who is 75 years of age or older, but it is considered income and may be subject to income tax.

It's unknown how much extra money the government would have if these tax advantages were eliminated. Since most people do not inherit estates worth more than £325,000, the great majority of people do not pay inheritance tax in any case.

People who have planned their money according to the present regulations and discovered that their loved ones would receive significantly less if those regulations were to be altered may likewise become enraged. Those who have already retired would be much more enraged since they have less time to address the situation.

 

Possible cap to tax-free lump sum

Anyone with pension savings can withdraw 25% of their funds as a tax-free lump payment up to £268,275 starting at age 55 (or 57 starting in 2028).

Some people, if they have one, utilise that money to pay down their mortgage. Some utilise it to assist their kids and grandkids in purchasing their first house.

There are rumours that the chancellor is thinking about reducing the cap.

People would ultimately pay more in income tax when they draw their pension if the tax-free ceiling is reduced. On the other hand, it is unclear when and how much additional money the government might raise in this way.

 

Pension tax relief

Every year, in the run-up to the budget, there is generally conjecture regarding modifications to external pension tax relief.

Pension tax relief refers to the fact that when you pay into a pension, a portion of the money that would have been taxed by the government instead goes into your retirement savings.

When contributing to a pension, you do not pay taxes; but, when you eventually withdraw the funds as income, you will.

The existing system provides pension tax relief at the same rate as your income tax band (20% in the case of basic rate taxpayers).

This implies that the relief is larger for people with higher rates, at 40% or 45% depending on their income tax rate.

According to some economists, providing everyone with the same amount of relief would be more just.

Lower-earning employees who presently receive 20% relief may benefit from a flat rate of relief set at, say, 25% as it would further reduce their tax payment.

But because tax relief would be less than it is currently, higher-rate taxpayers with an annual income of around £50,000 or more would lose out.

 

(Sources: bbc.co.uk)