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Labour’s tax raise on pledge £80k plus incomes will hit pensions

Tom McPhail
CEST

This would have significant implications for the retirement saving plans of millions of people. From Tom McPhail, head of policy – Hargreaves Lansdown.

Tom McPhail, head of policy: “If they’re going to start raising income tax, then it’ll have knock on implications for pensions too. Tax relief on pensions is based on income tax rates, so the more you earn, the more tax relief you can get on your pension contributions. Given the ideological leanings of this Labour party, it is hard to see them being relaxed about actually increasing pension tax relief for higher earners. This means we’d be likely to see the Annual Allowance Taper Threshold brought down to £80,000, a move which would be met with horror by employers and the pensions industry alike.”

“It isn’t clear at the moment whether Labour have thought this aspect through or what they plan to do about it but we should expect a further announcement on this from them. This issue also illustrates one of the myriad problems caused by the current pension tax relief system. Whoever forms the next government, they have to get a grip on pension taxation and look at a fundamental reform of the system.”

Gordon Brown first spotted this particular problem when he contemplated introducing a 50p rate of income tax. He drew up plans for a taper system (see explanation below), but never got the chance to introduce them because he lost the 2010 General Election. Treasury officials are not the kind to waste resources though, so when the most recent government started casting around for cost savings, the plan was dusted off and since April 2016, those earning over £150,000 have been subject to a progressive reduction in the amount they can pay into a pension.

What is the Annual Allowance Taper?
The current Annual Allowance is ordinarily £40,000. For those with income in excess of £150,000, the amount they can pay into a pension is progressively reduced on the basis of £1 of allowance lost for £2 earned, to a maximum reduction of £30,000. This means anyone with income in excess of £210,000 is restricted to total pension contributions of £10,000.

Why is the Taper a problem?
There is a social contract issue: Arguably it is unfair on higher earners, who are being asked to shoulder a substantial share of the income tax burden, without enjoying the pension funding benefits available to the rest of the population. More prosaically, there are administration issues for employers and employees alike.

Firstly the taper is calculated by reference to someone’s total income, not just their employment earnings. This makes it virtually impossible for employers to predict with certainty which of their employees will be affected and to what extent. So how do employers manage their responsibilities to their employees and how do they communicate with those who might be affected? Then there is the fact it applies in the current tax year; very often individuals will not know their total income for the tax year until the very end of the year, or possibly even after it has closed. This makes planning retirement saving very challenging. Should they join their employer’s pension or not? How much should they pay in?

How many people might be affected?
According to HMRC, there are 2.8 million people earning between £50,000 and £100,000, 466,000 people earning between £100,000 and £150,000 and 165,000 people with incomes between £150,000 and £200,000. Bringing the taper down to an £80,000 threshold from £150,000 is estimated to affect 1.2 million people. Indirectly it would make life more difficult for millions more.

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