Another million+ will need pension tax relief advice
11 March 2021
The importance of pension tax relief will extend to a growing number of people as the Chancellor’s new ‘stealth tax’ comes into effect, says Aegon’s pensions director Steven Cameron.
Forecasts by the Office for Budget Responsibility found that an extra 1.3 million people will start paying income tax and a further million will become higher rate taxpayers over the next five years, following the Chancellor’s decision to freeze income tax thresholds in last week’s Budget.
While many may have been relieved to find the Chancellor didn’t hike income tax, as per the Conservative Party’s 2019 manifesto, Cameron warned that that the introduction of a ‘stealth tax’ – where income tax thresholds will remain the same until April 2026 – will adversely affect people’s income.
Assuming increases in earnings of between 1% and 2% per year, someone earning £46,442 would rise above the £50,270 threshold within the next four years to become a higher rate tax payer.
Against this backdrop, Cameron says pension savers should be encouraged to pay more into their pension with higher rate tax payers currently receiving tax relief at their highest marginal rate.
Cameron says: “The way tax relief works has always made pensions particularly attractive for higher rate taxpayers. There were rumours ahead of the Budget that the Chancellor was considering changing the rules so everyone would receive the same tax relief at 25%.
“This would have been good news for basic rate taxpayers but would have given higher rate taxpayers less of a boost. The Chancellor didn’t introduce this change but that’s not to say he might not return to it in future Budgets.”
Cameron recommends that higher rate taxpayers or those who are likely to fall into that category in future years, look to pay more into their pension and obtain higher rate tax relief while the current rules continue to exist.
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