Pensions - Articles - Pension implications as 1 in 5 set to pay higher tax rate


Standard Life highlights the pension implications of today’s IFS figures which show one in five taxpayers are set to pay the higher rate by 2027

 A small silver lining in the form of higher tax relief on pension contributions. Better off pensioners need to manage their income more carefully.

 Dean Butler, Managing Director for Retail at Standard Life said: “The combination of frozen allowances and earnings growth is sucking an ever larger number of people into higher tax bands. The impact on people’s take-home pay is immediately clear with those breaching each threshold seeing a reduction in the value of each additional pound of earnings. This is of course in addition to the higher interest rate and inflation we're now experiencing which are an added squeeze on household budgets. However, less obvious is the impact on their pension contributions. Personal pension contributions benefit from tax relief at an individual’s highest marginal rate.

 As a result, those earning over £50,271 receive 40% relief on contributions, while those earning over £125,140 benefit from 45% relief. For those earning between £100,000 and £125,140 the benefit is even greater due to the removal of the personal allowance and those in this group can benefit from an effective rate of relief of 60%.
 
 “It’s not just workers who will be feeling the impact of frozen allowances. Historically relatively few pensioners have been higher rate taxpayers, but with a full state pension effectively using up the majority of pensioners’ personal allowance, those with significant savings or who have benefited from defined benefit pensions will need to look carefully at how much income they take each year, as only the first 25% of pension income is tax free.”
 
  

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