sting in the tail « DT Imago Blog

From the Scotsman – The Budget (2007) contained a sting in the tail for millions of middle- and lower-income workers by cutting the value of their pension savings.
Gordon Brown’s decision to reduce the basic rate of income tax from 22 per cent to 20 per cent from April 2008 will hit 22 million basic-rate taxpayers. The rate of income tax directly affects the amount of money savers invest in their pensions, because pension contributions attract tax relief up front.
Currently, when a basic-rate taxpayer puts £100 into a pension, it is topped up by £28.21 in tax relief.
When the basic rate of income tax goes down to 20p, the size of the gross pension contribution will be cut from £128.21 to £125.
To maintain the same level of pension saving, employees will need to increase their own contributions by around 2.5 per cent.
Just as the tax changes tend to favour the better off at the expense of the lower paid, the reduction in the basic rate will benefit wealthier savers when they draw their pensions. They will still receive 40 per cent tax relief on their contributions but after they retire will be taxed at 20 per cent on the money coming out, assuming they become basic-rate taxpayers.