Increasing the higher rate income tax threshold from £50,000 to £80,000 would create “income tax winners” for those earning above £50,000, but pension savers earning between these two values “will need to swallow the loss of higher rate pensions tax relief or take a 25% cut in future pension”, Aegon has said.

Research has revealed that the cost to an individual earning £60,000 and paying higher rate income tax of saving £5,000 a year into their pension is £3,000.

The government pays a top up of £2,000 in the form of tax relief at the individual’s highest ‘marginal’ rate of income tax of 40%. But if the individual becomes a basic rate taxpayer, the cost of saving £5,000 into their pension would go up to £4,000 because the government’s top-up would fall to £1,000, based on basic rate income tax of 20%.

Aegon pensions director Steven Cameron said: Increasing the higher rate income tax threshold from £50,000 to £80,000 will mean individuals earning over £50,000 will no longer pay 40% tax on that band of earnings. This will no doubt be very welcome and for those earning £80,000, could save them £6,000 a year in income tax. However, it also means those same individuals paying into pensions will no longer qualify for the higher rate tax relief which currently means a £5,000 pension contribution costs them only £3,000 after allowing for income tax savings. If these proposals are implemented, building up the same pot at retirement will cost them £4,000 after tax savings, or an extra £1,000 a year.

“While some may be tempted to keep the cost to them at £3,000, this will severely impact their ultimate retirement pot. It would mean the amount going in after adding on government tax relief would be £3,750, a quarter less than the previous £5,000. This also means the pension fund built up from future contributions and the income it could pay will be a quarter less.

“If Boris does implement the increase in the higher rate tax threshold, the overall impact will still be an increase in after tax pay. While those contributing to pensions will see less of an increase, we hope this will be recognised as a price worth paying to keep retirement plans on course.”

Share Story: