"We’d be likely to see the Annual Allowance Taper Threshold brought down to £80,000, a move which would be met with horror by employers and the pensions industry alike."
However Hargreaves Lansdown has warned that this would have "significant implications for the retirement saving plans of millions of people" due to the Annual Allowance Taper Threshold.
Since April 2016, those earning over £150,000 have been subject to a progressive reduction in the amount they can pay into a pension, however Hargreaves Lansdown believes this may be brought down to £80,000 under Labour's plans.
Under the current system, those with income in excess of £150,000, the amount they can pay into a pension is progressively reduced on the basis of £1 of allowance lost for £2 earned, to a maximum reduction of £30,000. This means anyone with income in excess of £210,000 is restricted to total pension contributions of £10,000.
Hargreaves Lansdown believes the Taper is "arguably unfair on higher earners, who are being asked to shoulder a substantial share of the income tax burden, without enjoying the pension funding benefits available to the rest of the population".
It added that as the taper is calculated by reference to someone’s total income, not just their employment earnings, it is "virtually impossible for employers to predict with certainty which of their employees will be affected and to what extent, making retirement planning "very challenging".
According to HMRC, there are 2.8 million people earning between £50,000 and £100,000, 466,000 people earning between £100,000 and £150,000 and 165,000 people with incomes between £150,000 and £200,000.
Bringing the taper down to an £80,000 threshold from £150,000 is therefore estimated to affect 1.2 million people.
Tom McPhail, head of policy at Hargreaves Lansdown, commented: “If they’re going to start raising income tax, then it’ll have knock on implications for pensions too. Tax relief on pensions is based on income tax rates, so the more you earn, the more tax relief you can get on your pension contributions. Given the ideological leanings of this Labour party, it is hard to see them being relaxed about actually increasing pension tax relief for higher earners. This means we’d be likely to see the Annual Allowance Taper Threshold brought down to £80,000, a move which would be met with horror by employers and the pensions industry alike.
“It isn’t clear at the moment whether Labour have thought this aspect through or what they plan to do about it but we should expect a further announcement on this from them.
“This issue also illustrates one of the myriad problems caused by the current pension tax relief system. Whoever forms the next government, they have to get a grip on pension taxation and look at a fundamental reform of the system.”
