Boris Johnson’s mooted income tax reforms would create a double-edged sword whereby income tax winners would become pension tax relief losers, according to research by Aegon.
Prior to his appointment as prime minister, Johnson proposed increasing the higher-rate tax threshold from £50,000 to £80,000, meaning those earning within this wage would be ‘winners’ by not paying as much income tax.
However, Aegon revealed pension savers earning within this range would also lose their higher-rate pension tax relief, leaving them receiving basic rate relief instead.
The firm noted that, if savers decided to reduce their pension contributions in order to keep tax charges unchanged, they could then face a 25% comparative drop in the value of their pension pot when they reach retirement.
Pensions director Steven Cameron said the proposal for those earning over £50,000 to no longer pay 40% tax will “no doubt be very welcome and for those earning £80,000, could save them £6,000 a year in income tax”.
However, he added: “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.”
Whether Johnson will prioritise this proposal will be seen in the Autumn Budget.
It also comes after he vowed in July to fix the NHS pension tax issue, with a consultation set to open on allowing members to set their own contribution levels in exchange for lower accrual rates.