Summer Budget 2015: Pensions tax relief slashed for higher earners
Higher earners are paying for increases to the inheritance tax (IHT) allowance through a reduction to the tax relief they receive on pensions contributions.
The move will hit savers earning more than £150,000 a year who will see their annual allowance of £40,000 gradually fall as their income increases.
At £160,000, the allowance will fall to £35,000, then gradually decrease to £25,000 at £180,000 and just £10,000 for those earning £210,000 or more.
Stewart Hastie, pensions partner at KPMG, said: "The reforms will create headaches for employees, employers and pension schemes. By design, individuals going above the Annual Allowance are effectively being taxed twice. But under the proposals, a significant number of impacted individuals are unlikely to know what their Annual Allowance is until it is too late to do anything about it."
He also said that employers would need to review the benefits offered to higher earners as the value of pensions decreases. According to KPMG a senior NHS Consultant earning £150,000 will suffer the equivalent of a 10% pay cut as a result of today’s announcement.
Nigel Green, chief executive and founder of the deVere group described the move as a "cap on aspiration".
He added: "How can this measure incentivise people to work hard and save to secure their own financial future? Targeting pension tax relief is nothing short of a cap on aspiration to do better, to save more. It is another example of how politicians of all parties seemingly believe that pensions are an easy and convenient target to bolster government coffers as and when they need to."
In its election manifesto the government announced that it would cut pensions tax relief for higher earners to fund the increase of the inheritance tax allowance to £1 million for married couples wishing to pass on the family home.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.