Rishi Sunak may smash this £40bn tax break and wreck YOUR pension! Do this now

Sunak has already launched two tax raids this year. In March, he froze income tax, capital gains tax and inheritance tax allowances until 2026, which will drag more people into the tax net over the next five years. Last month, he introduced the new £12billion a year National Insurance health and social care levy. Now the cash-strapped Chancellor could target pensions, but there is one thing you can do to protect yourself.

HM Revenue & Customs (HMRC) grants tax relief on pension contributions, to encourage people to save for retirement and ease the pressure on the State Pension.

Everybody automatically gets 20 percent tax relief, which means paying £100 into a personal pension only costs £80.

Higher rate 40 percent taxpayers can claim another 20 percent via their tax return, so £100 of pension only costs them £60. Somebody who pays additional rate tax at 45 percent only pays £55 for each £100 of pension.

This means the better off get more relief, and for years Chancellors have considered cutting higher-rates of pensions tax relief to even things out.

Now Rishi Sunak could finally act.

In 2019, former Chancellor Philip Hammond called the pension tax relief bill “eye-watering”, even though it was only £25 billion at the time.

The bill soared to an even more expensive £41.3 billion in the 2019/20 tax year, giving HMRC even more reason to cut it back.

Growth was largely driven by the new auto-enrolment workplace pension scheme, which has given millions of lower paid workers a company pension for the first time.

Tom Evennett, head of private client services at accountancy firm EY, said one option facing Sunak is to scrap both the 40 and 45 percent tax relief bands altogether. “He could then introduce a new single rate relief of just 25 percent.”

This will save HMRC a fortune yet could be sold as creating a fairer system, as basic rate taxpayers will actually get more relief than before. However, Sunak could cut it back to just 20 percent.

If he does, many will lose thousands in tax relief, and should take action now.

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If you are worried about losing higher-rate tax relief, make maximum use of it as soon as you can, said Andrew Tully, technical director at Canada Life. “Those higher rate taxpayers who can afford to pay more money into their pension may well want to do so now, before any changes come into force.”

Under the current system, a 40 percent taxpayer who invested the maximum £40,000 a year into their pension this year would get £16,000 worth of tax relief.

Tully said if tax relief was cut to 20 percent the tax break would be worth just half that – which means they would get £8,000 less. “That’s a real incentive to act,” Tully said.

We cannot say for sure what the Chancellor should do, but it is wise to use tax breaks like this one while they are still there, Tully added.