Insights

During their recent election campaign, the Conservatives announced plans to restrict the level of tax relief available on pension contributions for those in the top rate income tax bracket of 45%. Whilst no specific timescales for implementing this policy have been announced, given the level of activity already seen during the government’s first few months in office, it is likely that further details will be announced in the Budget next week. Therefore, if you pay income tax at this rate and are considering pension contributions, you may wish to bring forward any action to top up your pension before the Budget.

The Conservatives have already written promises into the Finance Act 2015 to maintain taxes at current levels, but similar promises have not been made to protect tax reliefs. Pension contribution tax relief for higher rate taxpayers costs around £7 billion a year, so a change of this nature will make a significant improvement to the Treasury finances without the need to introduce any policies that are likely to be unpopular with a vast majority of voters. It is possible that if this change is introduced in the July Budget, it will be effective immediately.

What are the current pensions tax relief rules for 45% taxpayers?

Taxpayers with an annual income of over £150,000 pay income tax at the rate of 45% on the portion of their income which exceeds that level. Currently, it is possible to receive full income tax relief on pension contributions of up to £40,000 in each tax year. When making pension contributions, basic-rate tax relief of 20% is credited to the contribution made and highest rate taxpayers can claim a further 25% tax relief on their self-assessment tax return.

In practice this works as follows: A pension contribution actually made of £100 is topped up by a 20% tax credit, making a gross pension contribution of £125. This amount can be used to extend the taxpayer’s basic rate band, meaning that the income taxed at 45% is reduced by £125, or put another way; the income taxed at 20% is increased by £125. This provides additional tax relief of 25%, i.e. £31.25. Therefore a gross pension contribution of £125 has received tax relief at 45% and has actually cost the taxpayer £68.75.

If you would like to discuss tax planning in more detail, please contact Lesley Stalker by emailing las@rjp.co.uk. We will be reporting on all the Budget news as it happens and issuing a special edition of Livewire to update you on the most pertinent changes.