General election 2015: What parties’ pension tax plans mean for your clients

Regardless of who is victorious at the 7 May general election, higher earners' pension contributions are set for a tax hit

Political parties’ plans for pensions tax after the general election are set to hit the highest earners the most, according to analysis.

Research conducted by Fidelity Worldwide Investment retirement director Alan Higham shows people on ‘lower’ incomes will be unaffected by the proposals of Labour and the Conservatives, though they could be worse off under Liberal Democrats’ suggested changes.

Labour has announced it plans to cut the rate of tax relief for those earning more than £150,000 a year – the threshold for paying the 45% additional rate of income tax – to basic tax.

Higham said this effectively takes pension contributions at 31.25% as well as increasing the 45% higher rate income tax rate up to 50%.

Meanwhile, the Conservatives have said they would limit the amount those earning above £150,000 can contribute to their pensions.

This would be achieved by reducing the annual allowance from £40,000 to £10,000 gradually for those above the additional rate threshold.

Higham pointed out this means that, for every £10,000 earned over £150,000, the annual allowance reduces by £5,000, thus those earning more than £210,000 will only be able to claim tax relief on £10,000 of pension contributions.

He added both the Conservatives and the Labour party plan to reduce the maximum pension fund you can have before a penal tax charge of 25% is applied, taking the threshold from £1.25m to £1m.

Elsewhere, the Liberal Democrats have proposed to set up a review to consider the case for applying a single rate of tax relief on pension contributions regardless of earnings. Recently, Steve Webb said he favoured relief at 33% which effectively taxes high rate tax payers’ pension contributions and gives them to basic rate/non-tax payer’s pensions.

But what does this mean for people in monetary terms?

Source: Alan Higham, Fidelity
Person A Person B Person C Person D Person E
Taxable pay £25,000 £50,000 £120,000 £170,000 £250,000
Group pension contribution £2,000 £8,000 £20,000 £30,000 £40,000
Labour £0 £0 £0 £7,750 £15,000
Conservative £0 £0 £0 £0 £13,500
Liberal Democrat (£400) £800 £8,000 £4,500 £7,000