The cut in the top rate of income tax announced by the Chancellor today, from 45% to 40%, could lead thousands of top earners to max out on pension contributions during the current financial year, whilst they can still get relief at 45% on the cost of saving into a pension, according to LCP partner Steve Webb.
High earners face some limits on the amount they can pay into a pension with the benefit of tax relief. These include:
- A tapered ‘annual allowance’, where those with ‘adjusted income’ over £240,000 can start to see their £40,000 annual allowance gradually reduced to as little as £4,000 for those on £312,000 or more;
- A lifetime allowance – frozen for five years – of £1,073,100 on the amount of lifetime pension saving which can benefit from tax relief.
However, unused annual allowances can be carried forward from up to three earlier years and higher earners will be looking to make sure they use all available allowances whilst they can still get the government to contribute 45p out of every £1 that goes into their pension.
Where higher earners expect to be paying a much lower rate of tax in retirement, saving into a pension can still be attractive, even for those who might find themselves over the Lifetime Allowance and facing LTA charges on withdrawals.
Commenting, Steve Webb said:
“There is likely to be a flurry of activity amongst Britain’s highest earners looking to make the most of the chance to get tax relief at 45% on their pension contributions. Whilst many high earners are affected by caps on annual and lifetime contributions, they are likely to be taking advice on how best to make the most of this very high rate of relief which ends at the end of this financial year. We could see thousands of top earners piling into pensions in the coming months”.