Pensions - Articles - The pension impact of reduction in basic rate of income tax

 Steven Cameron, Pensions Director at Aegon comments: “The reduction in the basic rate of income tax from 20% to 19% will be good news for millions of individuals. There is a slight sting in the tail regarding pension contributions. Individuals receive a ‘tax relief’ top-up based on their ‘highest marginal’ rate of income tax. Currently, the ‘net’ cost to an individual of investing £100 in their pension is £80 as when paying 20% income tax, their pension receives a £20 top-up from the tax man. In future, a 19% income tax rate means you’d need to pay in £81 from take-home pay to have £100 invested in your pension. So if individuals continue to pay in £80, their pension will benefit from a slightly lower £98.75.

 “While the change in income tax rate is from April 2023, pension schemes which collect pension tax relief for their members using what’s referred to as ‘relief at source’ are being granted an extra year to continue to collect at the 20% rate.

 “Even with this slightly lower tax relief, pensions still remain a particularly tax efficient investment. And those in workplace pensions will continue to benefit from a generous employer contribution too.”