In a recent report, the Institute for Fiscal Studies (IFS) has claimed that the policy announcements from the Conservative and Labour parties, which intend to cut pensions tax relief for those earning over £150,000, could potentially cause “chaos” for the UK.
David Cameron has stated that the Conservative party intend to cut inheritance tax (IHT), if his party is elected at the next general election, for properties worth up to £1m.
This would mean that a substantial asset could be passed on to younger generations of the same family without incurring tax.
The party has also announced its intention to introduce a £175,000 family property allowance; however, this would all be funded by reducing pension tax relief for the highest earners.
The IFS said: “Their proposals effectively increase the marginal tax rate faced by many of those with an income between £150,000 and £210,000 a year.”
50p of allowance will be lost for every additional £1 of income that someone earns if their salary is in the range between £150,000 and £210,000, according to the independent think-tank.
For those who continue to save income in a pension, the rule essentially means that their marginal income tax rate will increase to 67.5 per cent.
The Labour party has also indicated that it wants to cut pensions tax relief for high earners, with IFS warning that the party’s proposals would incorporate a massive increase that would have a huge financial impact on those affected.
In its conclusion, the IFS said: “We risk rushing towards something like chaos in the taxation of pensions for those on high incomes.
“Both Conservative and Labour plans will have substantial incentive and behavioural effects for those with incomes in the £150,000 to £200,000 range – potentially bigger effects than the 45 per cent (or 50 per cent under Labour) income tax rate itself.”