Prime Minister Boris Johnson’s proposal to increase the level at which people start paying high rate income tax would result in those benefiting from the change losing out on pensions tax relief, according to Aegon.

Johnson mooted the idea of increasing the higher rate income tax threshold from £50,000 per year to £80,000 per year.

However, those earning between £50,000 and £80,000, after deducting pension contributions, would lose higher rate pension tax relief and receive basic rate relief instead.

This would mean that the after-tax cost they receive would increase, and those who scale back contributions to keep the cost unchanged would face a 25 per cent reduction in their pension pot when they retire.

Aegon pensions director, Steven Cameron, explained: “Increasing the higher rate income tax threshold from £50,000 to £80,000 will mean individuals earning over £50,000 will no longer pay 40 per cent tax on that band of earnings.

“This will no doubt be very welcome and for those earning £80,000, could save them £6,000 a year in income tax. However, it also means those same individuals paying into pensions will no longer qualify for the higher rate tax relief which currently means a £5,000 pension contribution costs them only £3,000 after allowing for income tax savings.”

The government pays a top-up of £2,000 in tax relief, but if the saver becomes a basic rate income taxpayer, the cost of saving £5,000 into their pension would go up to £4,000, due to the government’s top-up falling to £1,000, based on basic rate income tax of 20 per cent.

Cameron added: “While some may be tempted to keep the cost to them at £3,000, this will severely impact their ultimate retirement pot. It would mean the amount going in after adding on government tax relief would be £3,750, a quarter less than the previous £5,000.

“This also means the pension fund built up from future contributions and the income it could pay will be a quarter less.

“If Boris does implement the increase in the higher rate tax threshold, the overall impact will still be an increase in after tax pay. While those contributing to pensions will see less of an increase, we hope this will be recognised as a price worth paying to keep retirement plans on course.”

The changes would not impact Scottish savers, as the Scottish government sets its own income tax thresholds, with the higher rate threshold being frozen at £43,430 per year.

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