"The Chancellor is finalising plans that could see the most attractive aspect of pension saving – the boost given to contributions in the form of tax relief – severely curtailed or even scrapped entirely.
While the Treasury insists that no decision has yet been made, advisers close to Number 11 say a reduction in tax relief for higher earners is “almost certain”.
The cut is likely to be announced in the Budget on March 16 – just 52 days away.
In the worst case Mr Osborne could scrap pension tax relief altogether. This would reward the Exchequer with a huge £35bn annual saving. It would align the pensions system with Isas through the creation of so‑called “pension-Isas”.
But sources suggest that this extreme savings model, first mooted last year, is not the Government’s preferred “solution” to cap the rising cost of pension tax relief.
Instead the likeliest outcome would be to cut back further the relief available to higher earners.
Top earners who pay the highest, 45pc additional rate of income tax have already been told their pension contributions will be drastically reduced through rules that take effect in April.
But now the Government is targeting swathes of middle and higher-earners – those 4.5 million people who pay 40pc tax on the top part of their income, who are likely to lose tax relief at the 40pc rate.
Instead their relief is likely to be limited to 20pc, or the basic rate of tax.
The impact on pension savings is “almost impossible to overstate”, according to experts.
For every £100 a basic-rate taxpayer contributes to a pension, the Government adds a further £25.
For every £100 a higher-rate taxpayer contributes, the state adds this £25, and the taxpayer can then claim a further £25 relief via his or her tax return. In total the benefit for a higher-rate taxpayer is thus £50 for a net £75 contribution – or a 67pc uplift.
If the latter, higher-rate relief were to be stripped away, the impact on long-term investing could be profound.
The graph shows how over time the same pension contributions grow depending on whether they receive no tax relief, tax relief at 20pc or tax relief at 40pc.
The calculations, by wealth manager Brewin Dolphin, assumes monthly savings of £200, rising by 3pc a year. The underlying investments are assumed to grow at 5.5pc annually, which is the average return, after inflation, generated by British shares over 100 years.
Over a three-decade period a higher-rate saver ends up with £425,000. A basic-rate saver gets a pot worth £319,000 and where no tax relief is added the final sum is £255,000.
“The Chancellor’s objective is firstly to save money,” said Tom McPhail of Hargreaves Lansdown, a major provider of self-invested pensions. “It is almost inevitable that higher earners will see their tax breaks further slashed.”
He added that there would be “political capital” for the Chancellor in scaling back 40pc relief, as it would “satisfy those critics of the current system who claim that it primarily benefits the rich”.
If Mr Osborne announces the loss of 40pc relief in the Budget it is generally expected that the cut-off for claiming the relief would be instantaneous.
In other words, pension contributions processed from that point would attract the lower rates.
More of pension doom from the ource: 52 days left of 66pc pension tax relief boost: This is what you need to do - Telegraph
AtW's comment - all those who voted for Tories deserve this!!!
While the Treasury insists that no decision has yet been made, advisers close to Number 11 say a reduction in tax relief for higher earners is “almost certain”.
The cut is likely to be announced in the Budget on March 16 – just 52 days away.
In the worst case Mr Osborne could scrap pension tax relief altogether. This would reward the Exchequer with a huge £35bn annual saving. It would align the pensions system with Isas through the creation of so‑called “pension-Isas”.
But sources suggest that this extreme savings model, first mooted last year, is not the Government’s preferred “solution” to cap the rising cost of pension tax relief.
Instead the likeliest outcome would be to cut back further the relief available to higher earners.
Top earners who pay the highest, 45pc additional rate of income tax have already been told their pension contributions will be drastically reduced through rules that take effect in April.
But now the Government is targeting swathes of middle and higher-earners – those 4.5 million people who pay 40pc tax on the top part of their income, who are likely to lose tax relief at the 40pc rate.
Instead their relief is likely to be limited to 20pc, or the basic rate of tax.
The impact on pension savings is “almost impossible to overstate”, according to experts.
For every £100 a basic-rate taxpayer contributes to a pension, the Government adds a further £25.
For every £100 a higher-rate taxpayer contributes, the state adds this £25, and the taxpayer can then claim a further £25 relief via his or her tax return. In total the benefit for a higher-rate taxpayer is thus £50 for a net £75 contribution – or a 67pc uplift.
If the latter, higher-rate relief were to be stripped away, the impact on long-term investing could be profound.
The graph shows how over time the same pension contributions grow depending on whether they receive no tax relief, tax relief at 20pc or tax relief at 40pc.
The calculations, by wealth manager Brewin Dolphin, assumes monthly savings of £200, rising by 3pc a year. The underlying investments are assumed to grow at 5.5pc annually, which is the average return, after inflation, generated by British shares over 100 years.
Over a three-decade period a higher-rate saver ends up with £425,000. A basic-rate saver gets a pot worth £319,000 and where no tax relief is added the final sum is £255,000.
“The Chancellor’s objective is firstly to save money,” said Tom McPhail of Hargreaves Lansdown, a major provider of self-invested pensions. “It is almost inevitable that higher earners will see their tax breaks further slashed.”
He added that there would be “political capital” for the Chancellor in scaling back 40pc relief, as it would “satisfy those critics of the current system who claim that it primarily benefits the rich”.
If Mr Osborne announces the loss of 40pc relief in the Budget it is generally expected that the cut-off for claiming the relief would be instantaneous.
In other words, pension contributions processed from that point would attract the lower rates.
More of pension doom from the ource: 52 days left of 66pc pension tax relief boost: This is what you need to do - Telegraph
AtW's comment - all those who voted for Tories deserve this!!!
Comment