Speculation intensifies around scrapping of higher-rate pension tax relief

Scrapping higher-rate pension tax relief would risk landing employees who earn over £50,000 with “eye-watering tax bills”, according to AJ Bell.

The investment platform was commenting on rumours ahead of the government’s ‘Tax Day’ which could see pension tax relief capped at 20%.

The Treasury is expected to unveil several documents and consultations on its future tax policies tomorrow (23 March).

AJ Bell has suggested that those in defined benefit (DB) schemes would be the most heavily affected by the scrapping of higher-rate pension tax relief, but warned that employer contributions to defined contribution (DC) pensions would also be hit.

“Given the black hole the coronavirus pandemic has blown in the Treasury’s finances, it is no surprise pension tax relief is now firmly in the Chancellor’s sights,” commented AJ Bell chief executive, Andy Bell.

“Pension tax relief across DB and DC pension schemes costs the Exchequer about £40bn a year. In this context, you can see why scrapping higher-rate pension tax relief might be attractive to a government desperately looking for ways to balance the books.

“However, whilst optically attractive, the reality of removing higher-rate tax relief on pensions is fraught with complications and it’s no surprise it has always been put back in the ‘too hard to do’ pile following previous Government reviews.

“Removing higher-rate tax relief could result in additional tax bills for millions of ‘middle Britain’ workers which will be politically toxic when people realise what it means for them.”

AJ Bell suggested that public sector workers would feel the biggest impact, including NHS and emergency services workers. Analysis by the investment platform revealed that a DB member earning £50,000 could be hit with a tax bill of £3,744, if pension tax relief is to be capped at 20%.

Bell added: “The impact would be most painful for people in public sector DB schemes and the sad truth is that this would include front line NHS and emergency services workers who have worked so hard to help the country through the COVID-19 pandemic.

“If the Treasury thought the anger caused among NHS doctors by the tapered annual allowance was bad, that will pale into insignificance compared to the mutiny we are likely to see if higher-rate pension tax relief is scrapped altogether.”

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