Andy Burnham has been urged not to make matters worse for high earners in the upcoming Budget.
Andy Burnham has been urged to reassure high earners (Image: Getty)
New Prime Minister Andy Burnham and his new Chancellor John Healey have been urged to provide reassurance to high earners in the next Budget because of a 60% tax trap and fears around pension tax relief often used to avoid it.
Financial experts at AJ Bell have pointed out that there is currently an effective 60% tax rate in the Income Tax system thanks to a Personal Allowance rule.
Currently, those who are set to fall into this tax trap can use pension contributions to avoid it, but financial experts are worried that speculation around tax relief rule changes can cause those who may be affected to make bad decisions ahead of the Budget in October.
Sarah Coles, Head of Personal Finance at AJ Bell, said: “One question that always comes up before a Budget is whether the tax relief on pensions is safe – something that would particularly affect higher earners.
“The consistent re-emergence of the topic ahead of each Budget is why AJ Bell has urged Healey to commit to a Pensions Tax Lock well in advance of 28th October by pledging not to alter tax relief or tax-free cash and prevent damaging speculation pushing people into making knee-jerk decisions about their long-term finances.”
High earners currently face a 60% tax trap thanks to the loss of the tax-free Personal Allowance at £100,000 income.
Ms Coles adds: “Each pay rise will push many higher earners closer to the £100,000 point, and creeping over this can be incredibly costly. Anyone with earnings between £100,000 and £125,140 faces an effective tax rate of 60%, because for every £2 you earn over £100,000, you lose £1 of your personal allowance. Once you earn £125,140, you will have lost the allowance entirely, and you move into the 45% tax bracket.”
There also exists another allowance for pensions for high earners: “Likewise, crossing the threshold into the tapered annual allowance for pensions can throw a spanner in the works. Very broadly this kicks in when you earn more than £200,000 and your ‘adjusted income’ is above £260,000. This includes a number of things on top of your net income, but most significantly it includes pension contributions.”
John Healey has denied he will raise taxes to pay for the pledges which Andy Burnham made when he became Prime Minister, which have included a temporary cut on VAT on electricity, and relief for pubs and bars.
Mr Healey said he would set out his “plans for taxation” at the budget, which will be unveiled on October 28 but vowed to “live with the fiscal discipline, within the fiscal rules”.
Asked whether taxpayers should expect to pay more for Mr Burnham’s first set of policy announcements, the Chancellor told ITV News: “No.
“The announcements we made as a new Government in the last few weeks, we know how we’re going to pay for them.
“In the budget, I’ll set out whole plans for the economy, plans for taxation, plans for the future.
“And that will be how we’d get activity, we get hope, we get growth back in every postcode.”