Are high earners about to see their pension perks slashed?

Are high earners about to see their pension perks slashed?

Time may be called for higher rate tax relief on pension contributions next week - hitting high earners who pay into a pension.

A government consultation on pensions tax relief is due to close on 30 September, with the expected result of slashing pensions tax relief for higher rate taxpayers.

The consultation, which was announced in the Conservative's post-election budget, seeks to establish whether the current system should be maintained or whether a new, more cost-effective, way of incentivising retirement saving could be introduced.

Under the current system, the tax relief on pension contributions is linked to the rate of income tax you pay, effectively rebating the tax you have paid on that money. This means it costs basic rate taxpayers £80 to save £100, higher-rate  taxpayers only need to pay £60 to save the same sum while additional rate payers contribute just £55.

However it's now widely believed that this model will be reformed in favour of a new 'flat rate' savings incentive.

Tom McPhail, head of pensions research at Hargreaves Lansdown said: "The game is up for higher rate tax relief. Higher earners may feel that's unfair but the Chancellor needs to balance his books and where else is he going to go but to the people who have the most money?"

However higher earners can still make the most of their existing rate of tax relief by maximising pension contributions now and savvy investors are already making the most of the tax break while they still can.

According to Hargreaves Lansdown, contributions from higher and top-rate taxpayers are already up 120% on the last tax year.

In addition to a flat rate tax incentive, a 'pension Isa', with limited up front incentives but tax-free withdrawals has also been debated. Although the Treasury appears interested in the option it has been widely discredited by the pensions industry, with McPhail describing it as "complicated, risky and probably unworkable".

He added: "Once you start exploring the transitional complexity, it is clear that the Pension Isa concept is dead in the water. It would be horribly unpleasant to deal with."

Maintaining the status quo is another option. While this might be popular among higher earners and the pensions industry at large McPhail said it's highly unlikely that it will be left alone. "With many major government departments' budgets protected and a commitment not to raise income tax or national insurance, the Conservative government has tied its own hands in terms of fiscal manoeuvrability. Pensions tax relief is just too tempting a prize to leave untouched."

The consultation process closes on 30 September and a government response is anticipated by the end of the year, potentially in the Autumn Statement, which is usually delivered in early-December.

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