In 2022/23, the cost of tax reliefs to the government reached a record of £48.7 billion, surpassing the combined budgets of the police, law courts, prisons, and fire services.

As a result of the freezing of income tax thresholds in 2021, the number of people transitioning to higher or additional tax rates has been increasing annually. This trend is consequently driving up the cost of pension tax reliefs to the government.

What changes will be made to pension tax reliefs?

Although there hasn’t been an official announcement, there is speculation that the government could be looking to implement a 30% flat rate for pension tax reliefs, scrapping the existing rates that align with your income tax rate. A flat rate on tax reliefs could save the Exchequer £2.7 billion per year.

How will a flat rate affect you?

The proposed changes to pension tax relief will have different impacts on taxpayers based on their income tax bracket. For basic rate taxpayers, the tax relief will increase from 20% to 30%. On the other hand, for higher-rate taxpayers, the tax relief will decrease from 40% to 30%, additionally, for additional-rate taxpayers the tax relief will drop from 45% to 30%.

Under the current system, a £60,000 (gross) pension contribution costs a higher rate taxpayer £36,000 and an additional rate taxpayer £33,000. However, if the proposed 30% flat rate is introduced, the cost will increase to £42,000 for both higher and additional rate taxpayers.

Conclusion

Whilst there is a lot of noise around tax reliefs on pension contributions, the Chancellor is unlikely to make an official statement until 30th October.

If the government do decide to make changes to tax relief on pensions then it would be wise to contact us to discuss any plans to make pension contributions before this date.

We look forward to hearing from you to discuss this.

Disclaimer

The Financial Conduct Authority does not regulate tax advice.

This article is not intended as advice and does not cover all scenarios.

Tax treatment varies according to individual circumstances and is subject to change.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Please seek professional advice from one of our advisers before making any financial decisions.