The Chancellor, George Osborne, is considering axing the option to take 25% of your pension as a tax free lump sum when you turn 55. Many contractors and freelancers currently look forward to receiving this lump sum as a windfall when heading in to retirement, however ex-pension minister Steve Webb, believes this is up for the axe. If these changes were to go ahead, the Treasury could save themselves as much as £4 billion a year.
Mr Webb has criticised the proposed plans, he, and many others, believe that the tax free amount is one of the best aspects of the current pension system. He has also voiced concerns on people’s motivation to save if this benefit is abolished – less people are likely to save if there is little incentive to. Contractors and freelancers are being advised to make last minute pension contributions now, as they’ll only have until the end of the current tax year to do so.
Angela James, contractor pension and investment expert, has commented:
“Although largely speculation at this stage, everything we do know about the Government’s plans for pensions reform and tax relief restrictions will impact negatively on high earners, including contractors.”
“All the indications suggest that restrictions on pensions tax relief will be announced on 16 March 2016 and could take effect immediately. Contractors with underfunded pensions or large cash savings in their company have only weeks to make tax efficient contributions to their pension before the new rules take effect.”
Contractors paying lump sums in to pensions before the tax year ends will also have the added advantage of being able to extract cash tax efficiently before the dividend tax changes come in to play.
Although nothing is yet set in stone in terms of pension changes, contractors and freelancers are being advised to consider their options as next month’s announcement is almost certainly not going to be positive for higher earners.
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