Flat Rate 25% Pension Tax Relief On Its Way

The Chancellor may announce in tomorrow's spending review a change in pensions tax relief to a flat rate of 25% and in-turn help the Government recoup some of the costs of Covid-19.  We think this unlikely and more likely in March's Budget but many are speculating it may be confirmed.

The speculated changes would mean basic rate taxpayers would receive a boost to their pension pots.

A basic taxpayer paying £100 a month into their defined contribution pension under the new flat rate of 25% tax relief would see this topped up to £133.33 an extra £8.33 than the current £125.00.

So, a 22-year-old earning £27,000 paying 4% could be better off by £21,000 in pension funds when they reach State pension age.

However, higher rate taxpayers would lose out, as their £100 currently increases to £166.66 the new flat rate would reduce this to £133.33 - losing 15% either via payroll deduction or self assessment tax return refunds.

So, a 35-year-old earning £60,000 and paying the same 4% could lose out by £85,000 or to maintain current retirement goals would need to initially contribute an extra £50.00 per month.

Comment

It is inevitable that tax relief changes are coming having been on the government's agenda ever since George Osborne was Chancellor but probably not tomorrow.