Labour has for some time championed the prospect of reducing or scrapping the “additional rate” taxpayers’ 45% relief. If Labour do form a Government in May it is likely this will become policy and will cut pension tax relief.
It is also understood that they may look to introduce a flat rate tax relief of 30% for everyone, meaning pensions would become more tax efficient for earners on a lower annual salary, but less attractive to higher earners paying 40% tax. Liberal Democrat pensions minister, Steve Webb has also supported this idea.
Emma Thomas, senior consultant at Ludlow commented on the plans.
Emma said: “Labour’s plan involves cutting pension tax relief for those earning over £150,000 so that they will only receive the standard 20% tax relief. The higher your salary the more tax relief you will lose. According to government statistics, approximately 300,000 additional rate taxpayers in the UK would be affected by the move.”
Each year savers are allowed to invest up to a maximum of £40,000 into a pension and they will get tax relief on this providing they’ve paid the relevant income tax on their salary. In addition to this savers are also allowed to carry forward any unused allowance from the previous three years. On top of the cut in tax relief, Labour has also said it will reduce the amount of money (£40,000 pa) people are allowed to put into their pension each year.
The lifetime allowance for tax-free savings would also be reduced to £1m from the current level of £1.25m. Emma concluded: “The key issue for savers is to make sure they use any potential allowances they have now as they could very well lose the additional tax relief which is currently available.”