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High earners to lose £44k under MPs’ plans

By August 14, 2018 April 22nd, 2021 No Comments
Financial News

High earners to lose £44k under MPs’ plans

By August 14, 2018 April 22nd, 2021 No Comments

A recent report by a Treasury select committee has recommended the introduction of a flat rate of 30% pension tax relief.

In effect, this would mean that higher rate taxpayers would lose out on £44,000 in pension tax relief, while that figure could be as high as £66,000 for top rate taxpayers. In contrast, lower earners would get a boost of £44,000. The current rate of tax relief enjoyed by higher earners is 40%.

The MPs report was called ‘Household finances: income, saving and debt’ and was prompted by a belief that the government’s current incentive for long term saving was not as effective as it could be in encouraging people to save into pensions. They felt the proposed change would promote a better understanding of tax relief as a bonus or additional contribution.

Under the current system, you receive tax relief on your savings as they enter the pension pot, at your marginal tax rate, while savings are taxed as you withdraw them for your retirement.

Here are a couple of examples of what the changes might mean. Imagine if you were a higher rate taxpayer, 40%, (with an income up to £46,349) getting tax relief on a gross sum of £10,000 per annum. Under the adjusted tax relief, this would be £3000, net cost £7000, as opposed to £4,000, net cost £6000, currently. If you take it that your fund after 30 years would have grown at a mid growth rate, this would be £308,000. However, after 30 years of reduced contributions under the tax relief change it would be £263,986 – a drop of £44,016.

Similarly, if you were a top rate taxpayer, 45%, (with an income over £150,000), the adjusted tax relief on a gross sum of £10,000 per annum would be £3,000, net cost £7,000, as opposed to £4,500, net cost £5,500, currently. Your fund after 30 years would have grown to £308,000, yet under the tax relief change it would be £241,995 – a drop of £66,005.

Not everyone agrees with the Treasury that tax relief isn’t a good incentive. In some quarters, it’s felt that reducing the top rate won’t increase savings but instead will create a cash flow problem for higher and top rate taxpayers.

Nonetheless, from a positive point of view the report has generated a lot of good debate and analysis. There have been some welcome recommendations such as the need to simplify the tax on pension savings by scrapping the lifetime allowance. It was also suggested that the money purchase allowance, i.e. the amount a person who has already begun drawing from their pension can pay back into their retirement fund without a penalty, be returned to £10,000 rather than the current figure of £4000.

One thing is for sure – pension tax relief is a complex area, which at the moment is in a state of flux. If you’d like to talk to one of our consultants about your particular situation, do get in touch here.

Sources
https://www.ftadviser.com/pensions/2018/07/30/higher-earners-to-lose-44k-under-mps-plans/
Example – Quotes obtained from the lowest cost platform and adjusted for inflation of 2.4 per cent over 30 years so that fund values are real terms figures. (Source: LEBC)