Government contribution limit for the increase in pension contributions
Final savers could be forced to pay pension tax on their salary increase if the contribution limit is reduced to Â£ 30,000
More workers on last-pay retirement plans could be penalized for getting a pay rise as part of the tax relief changes that the government would consider.
It is believed that the main members of the coalition are considering reducing the maximum amount that people can contribute each year to their pension funds from their tax-exempt salary of Â£ 50,000 to Â£ 40,000 or even Â£ 30,000.
But in addition to causing thousands of additional affluent savers to tax their pension contributions, the reduction in the allowance could also trigger an increase in the number of one-off tax charges levied on those in final salary plans that receive increases of salary – hitting those who are a far cry from contributing Â£ 30,000 of their own money directly into a pension.
Shine: A pay rise is always welcome, but more people could end up paying taxes on their pension contributions if their pay goes up.
This is due to the way the final salary benefits are calculated, with the salary increases actually being multiplied to reflect what needs to be put into a retirement pot to pay out their retirement benefits.
This means that while people on defined contribution pensions could pay up to Â£ 30,000 directly before the removal of tax breaks, savers with long-standing defined benefit final wage schemes would find a decent pay rise. might be enough to send them limit.
High incomes with more than Â£ 112,500 would also face a tax bill for their pension contributions if the limit of Â£ 30,000 were set.
Hargreaves Lansdown calculated that for a worker with 30 years of service in a 60th final pay scheme, a pay rise of Â£ 3,750 in a single year would send him above the limit if the allowance was reduced to 30 Â£ 000, which means they would be taxable on pension savings beyond that amount.
Currently, a worker on the same pension scheme would not be taxable on his pension contributions until his salary increased by Â£ 6,250.
Meanwhile, those with 20 years of service in a 60th scheme would be taxed on their pension contribution if their salary increased by Â£ 5,625 if the allowance was reduced to Â£ 30,000, compared to Â£ 9,375 that would have to be skipped before being subject to tax. now.
Indeed, the calculation of the annual allowance for final salary schemes takes into account the increase in total pension rights from one year to the next.
A significant salary increase would directly fuel an increase in the value of pension rights for salary-related schemes, as such a salary increase would result in a tax burden in the year it occurs, but not in subsequent years.
The possibility of Chancellor George Osborne announcing changes in next month’s fall declaration has been greeted with dismay in a pensions industry hungry for stability and already working on major changes as a result of automatic enrollment.
There is also anger that savers are once again penalized for raising government coffers, with allowance cuts to Â£ 40,000 or Â£ 30,000 expected to generate Â£ 600million and Â£ 1.8 billion respectively. of pounds sterling.
Stop tinkering: Tom McPhail, of Hargreaves Lansdown, says industry wants government to slow the pace of pension changes.
According to Hargreaves Lansdown, people on final wage schemes currently have to earn Â£ 187,500 before they have to pay tax relief on their contributions each year.
If the allowance were reduced to Â£ 30,000, anyone earning more than Â£ 112,500 could be subject to tax on part of their contributions, although the trigger level of salary may be slightly higher, as these figures do not take into account the impact of inflation on annual income. allowances.
Jason Hollands, Managing Director of Bestinvest, said: “Such a move would come at a time when, according to the Department of Work & Pensions, retirement savings are already at their lowest level in a decade and research suggests that even a out of four people in the 40 per cent tax bracket do not contribute to a pension, despite the obvious attraction for them to do so.
âSo what, some might say, Â£ 40,000 is still a lot of money to save in a year!
âThat’s true, but the reality is that many middle-class investors have to catch up on retirement as retirement approaches, only making larger contributions once their children have grown up and that their mortgages are paid off and that they are faced with the reality of how much they need to increase their funds to generate a decent retirement income. ‘
Tom McPhail, head of pension research at Hargreaves Lansdown, said: âInvesting in a pension is the most tax efficient way to save for retirement, which may be why politicians cannot refrain from tinkering with the rules.
âHigher rate taxpayers and members of the final wage scheme will lose out from any tax raids. We hope George Osborne will resist the temptation to plunder our retirement savings, but we are not convinced that he will be able to resist the lure of what must seem like easy money to him. ‘
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