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Budget 2007: Pension incentives rise for high-rate taxpayers

Budget tax changes have given advisers a strong case for advising higher-rate taxpaying clients to put more into a pension, says Hargreaves Lansdown head of pensions research Tom McPhail.

He says by maximising tax breaks on contributions and lowering tax paid when receiving a pension, higher-rate taxpayers will be better off.

He says higher-rate taxpayers will benefit from the tax rate threshold rise to £43,000 while still getting 40 per cent tax relief and can additionally take advantage of salary sacrifice to save on NI and income tax.

He says the majority of higher-rate taxpayers will become lower-rate taxpayers in retirement and so benefit from the rise in the lower rate of income tax from £7,280 to £9,770 and the lowering of basic rate of income tax to 20 per cent.

McPhail says: ‘These changes will make saving for a pension more attractive for higher-rate taxpayers. There is a positive message here. It looks as if Gordon has finally got it right.”

Bates Investment Services head of communications Paul Ilott says: “Many people will not realise the rate of income tax directly affects the amount of money they invest into their pensions because pension contributions attract tax relief. A reduction in income tax has the effect of reducing the level of gross pension contribution paid.”

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