High earners pile into pensions amid tax relief overhaul fears

Higher and top-rate taxpayers are dramatically ramping up pension contributions as the Treasury considers a radical overhaul of the tax system.

An analysis of contributions by Hargreaves Lansdown clients shows that customers are putting 61 per cent more aside following the summer Budget, when Chancellor George Osborne announced a consultation on overhauling how pensions are taxed.

Contributions from higher and top-rate taxpayers are also up 120 per cent for the tax year, according to Hargreaves’ figures.

One reform option under consideration would see the tax relief system flipped so contributions, rather than withdrawals, are taxed. Policymakers could also opt to introduce a flat rate of tax relief, rather than giving savers relief at their marginal rate.

The consultation on tax relief reform is due to close on 30 September.

Hargreaves Lansdown head of pensions research Tom McPhail says: “The game is up for higher rate tax relief; higher earners may feel that’s unfair but the Chancellor needs to balance the books and where else is he going to go but to the people who have the most money.

“Savvy investors are making the most of these earnings related top-ups while they still can.”

McPhail says he anticipates the Treasury will opt for the flat rate tax relief option, describing the likelihood of the exiting upfront tax incentive being removed as “remote”.

He adds: “Once you start exploring the transitional complexity, it is clear that the Pension Isa concept is dead in the water. It would be horribly unpleasant to deal with.”