AJ Bell's Tom Selby examines the potential impact to retirement savings
Thursday 05 Dec 2019 Author: Tom Selby

What would happen to pension tax relief under Labour? I know they’ve proposed increasing income tax for the wealthiest but wouldn’t this just encourage more people to pile money into pensions?

Jeffrey


It’s impossible to know for sure what either of the major political parties will do on pension tax relief. Neither the Conservative nor Labour manifesto documents discuss reform of retirement saving incentives specifically.

Labour’s income tax proposals are targeted at the highest earners in the UK. The manifesto pledges to bring anyone with income over £80,000 into the 45% tax bracket (this currently only applies to someone earning above £150,000) and create a new 50% income tax rate for those earning above £125,000.

Before we get into the pension tax implications of these proposals, it’s worth noting that this analysis does not apply to Scotland, which operates its income tax policy independent of the rest of the UK.

Pension tax relief gives you back the income tax you’ve paid on your earnings. Currently if you earn £60,000 you’ll pay 40% tax on £10,000 (the bit above £50,000) and 20% on the rest (after your personal allowance). If you paid £20,000 (gross) into your pension you would therefore get 40% tax relief on £10,000, and 20% tax relief on the other £10,000.

You can only receive tax relief on contributions up to 100% of your UK earnings any given tax year. There is also the annual allowance to consider, which is set at £40,000 for most people although is lower for people who have accessed taxable income from their pension (£4,000) or have income of more than £150,000 a year (between £40,000 and £10,000).

If you contribute more than your annual allowance you will still receive tax relief in the usual way, but you will get an ‘annual allowance charge’ which recoups the extra tax relief you’ve had over the allowance.

For SIPP investors, tax relief is granted via the ‘relief at source’ system, whereby your provider adds 20% tax relief to your fund automatically and you claim back any additional relief through your tax return.

Assuming tax relief remained unchanged under Labour, its income tax plans would boost retirement saving incentives for those on the highest incomes.

For example, someone earning £100,000 would be able to save £5,000 in a pension at a net cost of £2,750 under a Labour Government – £1,000 added automatically through 20% tax relief, and a further £1,250 (25% relief) claimed back through their tax return. That’s almost 10% less than the £3,000 it would cost to save the same amount at the moment.

Similarly, someone earning £160,000 could save £5,000 in a pension at a net cost of £2,500 under Labour, versus £2,750 under the current system.


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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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