While proposals to raise the higher rate income threshold would save better off earners tax, they would lose out on valuable pension contributions
In his pitch for the leadership of the Conservative Party, Boris Johnson called for the higher rate threshold for income tax to be raised from its current level of £50,000 to £80,000.
This would be good for workers (excluding Scotland where tax rates are devolved) earning between £50,000-£80,000 as they would no longer have to pay the higher rate of 40% on earnings above £50,000.
But the reforms would contain a sting in the tail for workers' pensions.
For example, a worker earning £60,000 per year that saved £5,000 into a pension each year would expect to pay £3,000 from their wage and received 40% tax relief - or £2,000.
But, if the threshold was moved the worker would have to contribute £4,000 to achieve a £5,000 total saving, as the tax relief would be trimmed back to 20%, in line with their income tax rate.
Pension provider Aegon is warning caution on these proposals. The firm says people could end up with a 25% reduction in their retirement income if they fail to make up the difference, or face swallowing the extra cost of topping up their pots.
Steven Cameron, pensions director at Aegon explains: “Increasing the higher rate income tax threshold from £50,000 to £80,000 will mean individuals earning over £50k 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."
In recent days there has been much speculation about a possible 'emergency no-deal' Budget from Chancellor Sajid Javid. However, parliamentary arithmetic makes many different outcomes possible.
And while these income tax reforms are not guaranteed to happen, Mr Cameron urges people to be aware that were they to come into force, they should consider letting their pensions absorb some of the benefit of the income tax cut.
“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," he says.
“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.”
Just to confirm - this article is seriously arguing that the income tax rate shouldn't be raised, because individuals wouldn't be able to take advantage of saving on the tax that they would saved, had the tax still been in place?
With this logic, everyone should pay a higher amount of tax, just so they can subsequently save on the tax they will pay due to compulsory pension contributions.
This article just looks like its shilling for the pension companies...
It makes my heart bleed.
So if they gain up to £6K and lose £1K they are still £5K better off. These tax reductions should be used to make the lower end better off and all the tax payers would get an equal reduction giving more workers a better living wage instead of the top ones getting much better off. Don't say if they intend to move NI upper limit to £80K in line with tax band so they pay 12.5% up to £80K instead of £50K.
Eh? Run those calculations…
Eh? Run those calculations in detail, if you will. Assuming salary sacrifice (as most would employ) I am perplexed that tax relief would not be offset by non-taxable income.
This is so stupid.
If they don't change their contribution rate then there is no overall impact on their pension pot.
You may not get the same tax relief but you're still in a better position as you'll have all that 20%tax that you have saved for earnings between 50k and 80k that hasnt been contributed.
Theres no way you can be in a worse position. The only kicker is National Insurance, which wasnt the argument made.
I agree with Moshe
Exactly. I can't believe what people can write and publish without proper review. It's either deceptive or very stupid.
Advice to the writer:
Go study some maths before you preach economics
Likely someone earning £60 to £80K will have the sense to use part of their tax gift to maintain the status quo of their pension. Am no longer surprised when a good news article (for some) becomes time expired and is then regurgitated as bad news (two for the price of one).
This is nonsense (much like many of the moneywise articles) Time to unsubscribe.
So you save £5k and lose £1k and that's bad news? Come on guys, use some common sense.
Higher rate pension tax relief
Why would Moneywise publish such rubbish ?
Most of us, even if not using salary sacrifice, think in terms of gross contributions so only those who don't think about it will see their pensions hit. We'll still be better off even if they increase the NI threshold in line. What I'd prefer to see is an end to the regressive tax policy of reducing the personal threshold on earnings over 100K meaning a marginal tax rate of 60% plus 2% NI leaving me 38p in every pound of bonus I earn. Don't get me wrong, I know I'm lucky to get that extra money, but I'm not going to bust a gut to see the bulk of it go to be wasted by the government.
Oh no! better find lower paying job!
This article is nonesense, please run your calculations again or re-enroll in GCSE mathematics, I would literally stop my pension contributions and pay for your private
What a load of B****CKs
This is a spoof article right?..Seriously...it has to be?!?!
The people earning £80k will be earning just under £600 more each month. That could fund a buy to let home in the North earning an immediate passive income as well as acting as an investment for the retirement pot.
It is also important to note that even if this Aegon's scaremongering was a reality (which it really isn't) this would not impact those in defined benefit schemes.