Fact

The announcement from Kwasi Kwarteng which has been referred to as the ‘rabbit in a hat’ revelation was the abolition of the additional rate of tax of 45%, from April 2023. This was then followed by the news that the basic rate of income tax would be reduced from 20% to 19% from April 2023. This means the change will be implemented a year earlier than promised by previous chancellor of the Exchequer, Rishi Sunak, in his spring statement, in which he pledged to do this by April 2024.

Once the additional rate of tax is removed, there will no longer be a rate of tax of 45% placed on annual income above £150,000. Therefore, all annual income above £50,270 will be taxed at the higher rate of income tax (40%). According to the Growth Plan documents, this will cut tax for approximately 660,000 individuals from April 2023. The change will apply to the main rates which apply to:

• non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland
• the savings rates applicable to savings income for taxpayers across the UK
• the default additional rate applicable to non-savings and non-dividend income of any taxpayer not subject to either the main rates or the Scottish rates of income tax.

Even though the basic rate of tax is reducing to 19% from April 2023, there will be a four-year transition period for Gift Aid relief, to maintain the income tax basic rate relief at 20%, until April 2027. There will also be a one-year transitional period for relief at source pension schemes to allow them to continue to claim tax relief at 20%.

So basic rate tax-payers (the majority of pension savers) will get 1p in the pound more in tax relief than higher rate tax payers, a perk that could be worth almost £3oo to those saving into personal pensions, SIPPs and master trusts like Nest and Peoples Pensions. There will be interesting decisions to be made for employers who split employees between Legal and General’s two master trusts, one operates on a net pay basis (fine for higher rate tax-payers), the other on relief at source, (best for the rest). But will it be worth disturbing membership for a transitory benefit? Such are the complex impacts of messing with pension taxation.

Fiction

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The government decision to bring forward the 1 percentage point cut to the basic rate of income tax to April 2023, 12 months earlier than planned, means a the corresponding cut in pension tax relief on pension contributions is also brought forward.

— Josephine Cumbo (@JosephineCumbo) September 23, 2022

It’s not often that I challenge Jo Cumbo, but she’s wrong on this.

I also challenge Steve Webb’s contention that

“Whilst many high earners are affected by caps on annual and lifetime contributions, they are likely to be taking advice on how best to make the most of this very high rate of relief which ends at the end of this financial year,” said Sir Steve Webb, partner with LCP, the actuarial consultants. “We could see thousands of top earners piling into pensions in the coming months.”

The scope for last minute “piling into pensions” from those paying tax at 45% is likely to be minute. Most are caught by the annual allowance and in particular the taper of the annual allowance that reduces dramatically to £4,000 as those earning more than £240,000, close in on the £312,000 top of the taper.

Just to put into perspective how rare a bird , the 45% tax-payer is , read this tweet.

Speaking to a client when the 45% tax cut was announced. He was disbelieving that even advising the wealthiest in society fewer than a dozen of my clients pay 45% tax.

— Alistair Cunningham (@Cunningham_UK) September 24, 2022

The impact on pensions of these rare birds finding some unexpected headroom can be likened to the freedoms of a canary in a coalmine.

Speculation

The Daily Telegraph tell us that help is at hand for the benighted few who find they may have to pay 55% on some of their pension savings when drawing the money down, either as cash or to buy an annuity.

Treasury officials are drawing up a list of “pinch points” that discourage people from earning more money by imposing high rates of tax on extra earnings, as part of a wholesale review of the tax system.

Up to 1.6 million savers could benefit from a review of the lifetime and annual allowances on pension pots, which currently can encourage employees to take early retirement to avoid the “tax trap”.

Well , that’s alright and entirely in keeping with everything we have heard from the Chancellor and Prime Minister over the last few days.

I would like to do my own bit of speculation. I would like to think that the 1.2m less productive workers who currently overpay their pensions by 25% because they suffer from the “injustice” (HMRC’s word) of the net-pay anomaly, will get a hardship payment in 2023 to encourage them to stay in pensions, despite the cost of living crisis.

The chances of that happening are somewhere between Bob Hope and No Hope. It’s no use rewarding the pawns of growth when we’ve got the knights, bishops and royalty of pensions to look after.