Anyone saving £100 a month into their pension will have to pay £12 more a year in order to save the same amount after the changes in income tax rules.
At present, pension contributions by basic rate taxpayers get 20 percent tax relief.
This means that if you put £80 into your workplace pension, the Government adds an extra £20 on top. But once the change in income tax is implemented, for every £100 saved in a pension will cost £1 extra.
Employed workers making contributions automatically through payroll – where their company takes a set proportion of their salary out and puts it into their pension – will automatically pay more money to compensate for the decrease in pension benefit they will see.
However self-employed people are advised to consider topping up their personal pension by this amount.
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “It doesn’t sound like much in the scheme of things, but you want to make sure your retirement doesn’t suffer as a result of tax changes that affect pensions today. For people with workplace pensions paying in a set percentage of salary, this reduction in tax relief will barely be noticed.
“However self-employed people paying in under their own steam might want to increase the amount they put in if they want to have the same overall contribution. Returns from contributions and investment growth compound over time so keeping your contributions up is important.
“The more people contribute to their pension, the more they’d feel the impact of this lower tax relief.
“But even for someone paying in £500 a month – much higher than typical contributions for someone on an average salary, retaining their overall contribution at the same level would cost them just £5 a month more, or £60 more over a year. “
For so-called “relief at source’ schemes” such as Self-Invested Personal Pensions (SIPPs), where a person manages their own pension and decides where it is invested, there will be an extra year of relief at the 20 percent rate until April 2024, meaning such savers will benefit from the current rate of pension relief while paying a lower rate of income tax.
For wealthy pension savers, there will be various considerations that may need to be made too. The removal of the additional 45 per cent rate of income tax – levied on earnings over £150,000 – will now be abolished, which means that for this group for every £100 they save they will have to contribute £5 more.
This may be mitigated to some degree by the scrapping of the additional rate of dividend tax, which sits at 39.35 per cent on dividends over the £2,000 allowance at present.
This is because anyone with stocks that pay dividends – regular amounts of money paid as a thank you to the investor for their investment – that pay over this amount a year, will now have to pay less 1.25 percentage points less tax.
This will bring down how much they pay in dividend tax to 32.5 percent.
Elsewhere, Mr Kwarteng said the government would bring forward draft legislation to remove “well-designed performance fees” from the scope of the pension charge cap.
The pension charge cap sets limits on what providers of workplace pensions can charge. It is the annual amount that can be charged to savers in defined contribution workplace pension schemes used for auto-enrolment.
The cap, set at 0.75 per cent of funds under management, has been in place since April 2015.
The move by the Chancellor seems to suggest that workplace pension funds may now be able to invest in potentially riskier funds that charge higher fees above the cap, as long as the design of its fees are “well-designed”.