Retirement savers paying higher rates of tax should top-up their pensions now before they miss out if tax relief rules are changed in Budget 2016.
Chancellor George Osborne has hinted he plans to slash pension contribution relief in his Budget Speech on March 16.
That gives high earners just over a month to review their finances and check if they have any spare cash sloshing around that could go into a pension and gain higher or additional rate relief.
The government is considering flat rate pension relief of between 20% and 30%, according to leaks from the Treasury.
That will lop 10% off a higher rate taxpayers pension relief and 15% from contributions made by an additional rate taxpayer.
How pension tax relief works
In monetary terms, what does this mean for taxpayers?
Someone paying tax at the higher rate paying £10,000 into their pension gains £4,000 tax relief, making the value of their contribution £14,000.
Anyone who can put the full £40,000 allowed contribution in now would see a £16,000 top up, making a total contribution of £56,000.
For additional rate taxpayers, the figures pan out as £4,500 for a £10,000 contribution and £18,000 for the full £40,000.
The total contributions add up to £14,500 and £58,000.
Under the proposed rules, a 20% flat rate would see tax relief on a £10,000 contribution for a higher and additional rate taxpayer would drop to £2,000.
If the flat rate was 30%, all taxpayers would receive £3,000 on a £10,000 contribution.
Time may be running out
“Those paying higher rates of tax have traditionally been awarded more relief on their retirement savings. It would seem that this time-honoured practice is to be axed,” said financial expert Nigel Green, chief executive of expat IFA deVere Group.
“Therefore, middle-class savers who have been prudently putting money aside for their retirement are going to be hit by Osborne’s plans.
“Those paying higher rate tax are likely to see a significant drop in their retirement funding, so it would make sense for those that can to pay in a one-off top-up to their fund as soon as they can.”
Retirement savers considering a switch to a Qualifying Recognised Overseas Pension Scheme (QROPS) can boost their pensions by adding the extra cash now to gain the additional relief as QROPS rules allow all topped up contributions to be transferred along with the rest of the fund.
