Workers on a higher tax rate could be hit by an £80,000 Labour tax raid leaving them with £80,000 less in their pension pot, according to new analysis.
Under the current system, tax relief on pension contributions set at marginal rates includes a basic tax rate of 20 per cent.
Higher tax rates are at 40 per cent with an additional rate of 45 per cent.
However, proposed changes by Labour on pension tax relief would mean higher earners could face a whopping £80,000 reduction over their working life.
As part of Labour’s broader tax policy reviews alongside Chancellor Rachel Reeves, a potential flat rate of 30 per cent of pension tax relief could be introduced.
Chancellor Reeves is said to be reviewing these plans in her first Budget next month.
These proposed changes will have a knock-on effect for the wealthy pensioners significantly impacting their retirement future.
The move is part of Sir Keir Starmer’s broader strategy as the PM warns of “painful” fiscal measures ahead.
Labour hopes the change will help basic-rate taxpayers currently receiving a marginal income tax rate of 20 per cent on their tax relief on pension contributions.
It may be good news for the basic-rate taxpayers but for those on higher or additional-rate a significant loss will be felt.
According to an analysis by wealth manager Quilter Wealth, a worker who remains in the higher-rate tax bracket would receive £83,506 less over a 40-year career if this new 30 per cent rate is introduced.
Whereas a basic-rate taxpayer would receive £27,807 more in their nest eggs.
This would mean a higher-rate taxpayer’s pension pot would be lowered by more than 10 per cent from £794,984 to £711,477.
A basic-rate taxpayer’s pot, however, would be 10 per cent higher from £288,090 to £315,897.
Many have argued the Chancellor should not forge ahead with these changes including The Institute for Fiscal Studies (IFS) warning against adopting this “superficially appealing policy”.
Ian Cook of Quilter Cheviot echoed these concerns stating that this proposed change by Labour would “fundamentally alter” how tax relief is applied.
Despite these declarations from experts, the new tax relief proposals will mean a significant increase in revenue for the Government with a capping relief at 20 per cent yielding £15 billion and a flat 30 per cent rate yielding £2.7 billion.
Chancellor Reeves will deliver the first Labour Budget in 14 years on October 30, 2024.
