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Pensions tax raid on cards for higher earners

All the main political parties plan to reduce pensions tax relief for higher earners
April 29, 2015

As the race to occupy 10 Downing Street intensifies, all three main parties have expressed support for reducing pension tax reliefs for higher earners.

The cross-party consensus means those earning more than £150,000 a year are extremely likely to see their pension contributions taxed more heavily, whichever government is formed after the election.

Currently those earning more than £150,000 who are subject to the 45 per cent tax band can receive up to 45 per cent tax relief for their pension contributions, meaning a £40,000 pension contribution (the maximum allowed this tax year) could only cost them £22,000 after the reliefs. This benefit, along with the ability to use up unused past pension allowances for the past three years - known as carry forward - makes pension relief an attractive option for higher earners.

However, the Conservatives have said they plan to use a reduction in pension tax relief for higher earners to fund a cut to inheritance tax. They intend to cut the current £40,000 annual pension allowance for anyone earning over £150,000 on a sliding scale down to just £10,000 a year for those earning £210,000 or more.

Labour is also planning to use a reduction on tax relief on pension contributions for higher earners to fund a cut to university tuition fees. They plan to reduce the annual pension allowance from £40,000 to £30,000 for everyone and reduce tax relief contributions to 20 per cent for those earning more than £150,000, as well as increasing the 45 per cent higher-rate income tax rate to 50 per cent.

The Liberal Democrats plan to establish a review to consider the case for introducing a single rate of tax relief for pensions. Although not official policy, Liberal Democrat Pensions Minister Steve Webb has previously suggested flat rate pensions tax relief at 33 per cent.

But what do the parties' proposals mean in monetary terms for those on different incomes?

Analysis by Alan Higham, retirement director for Fidelity Worldwide Investment, in the table below shows that higher earners will experience the biggest increases in tax, across all three parties' proposals. The Liberal Democrats' proposed single rate of tax relief (as expressed by Steve Webb) would also hit those lower down the salary scale.

 

Extra tax paid on pension contributions under political party proposals

 Person APerson BPerson CPerson DPerson E
Taxable pay£25,000£50,000£120,000£170,000£250,000
Gross pension contribution£2,000£8,000£20,000£30,000£40,000
Extra tax paid
Labour£0£0£0£7,750£15,000
Conservative£0                £0£0£0£13,500
Lib Dem*-£400£800£8,000£4,500£7,000

*As expressed by Steve Webb

Source: Fidelity Worldwide Investment

 

All three parties support the policy announced in the Budget of reducing the pensions Lifetime Allowance to £1m. This is the maximum value of total pension pots allowed and includes contributions and any growth on them. Above the £1m limit a punitive tax charge of 55 per cent applies.

Mr Higham advises investors to "make hay while the sun shines" and use the current pension contribution arrangement before a new government comes to power.

Adrian Walker, retirement planning manager at Old Mutual Wealth, said: "Pension tax relief is being used like an election piggy bank and there is a danger that the emerging good will towards pensions is stunted."

Investors concerned about the impact of changes to tax relief should consider seeking financial advice as to whether they should act sooner rather than later in bringing forward any planned contributions.