People earning over £50,271 warned over tax change from October
People earning over £50,000 a year have been issued a warning over new pensions tax relief rules under the Labour Party government. Higher rate taxpayers earn over £50,271 while additional rate earners earn over £125k.
Speaking ahead of Chancellor Rachel Reeves' Budget on October 30, Helen Morrissey, head of retirement analysis, said: “Pensions tax relief offers an enormous incentive to save, and any tinkering around the edges risks putting people off. A move to a 30 per cent flat rate would spell good news for basic rate taxpayers, who would see a £100 contribution cost £70, rather than £80, but it would be a blow to higher and additional rate taxpayers who currently enjoy relief at 40 per cent and 45 per cent.
“Meanwhile, a shift to 20% across the board would mean no change for basic rate taxpayers, but a massive decrease for higher earners. Bringing in such a change could also have unforeseen consequences for defined benefit pensions.
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"Lower tax relief would mean that in order to guarantee the same benefit for members of public sector schemes, more money would need to be paid in. For senior members of staff, including doctors, this could mean contributing more than the annual allowance, which could result in an immediate tax bill.
“This could raise the risks of these staff members retiring rather than paying the tax – taking the government back into the same problems the previous one suffered around the lifetime allowance. It means this is unlikely to be an issue anyone wants to reopen.”
Ms Morrisey said: “Any attempts to reduce the amount of tax-free cash people can take from their pension would prove hugely unpopular. People have plans for this money, whether that’s paying off their mortgage or making home renovations.
"Any changes risk throwing long-standing plans into chaos. The danger is that this results in people pulling their tax-free cash out early, in an attempt to avoid any such raid, which could lead to poor outcomes.”