Monday, 15 July 2013

Cutting pension tax relief

The Pensions Policy Institute and Age UK are floating the idea of cutting pension tax relief for higher earners and introducing a flat rate of 30%.

In other words, whether you paid 20% income tax or 40% or 50%, you would get a tax refund in your pension plan equivalent to 30% tax.

The PPI presents this idea as revenue neutral, for the Treasury, and as potentially incentivising lower earners to save more in pensions.

There are two ways in which this idea could be of major interest to George Osborne:

1. The big problem with auto-enrolment, under which workers are being automatically signed up for company pensions and having money deducted from their pay, is that the resulting pensions for most will be tiny.

So boosting the value of contributions at the lower end, makes auto-enrolment look more viable.

2. The Chancellor could save as much as £16bn a year.

The PPI calculates that a 30% flat rate would cost the same as the current system: £35bn. However, restricting tax relief to the basic rate of 20% would reduce the annual cost to £19bn-£22bn. It could be tempting to grab some or all of that £16bn difference - in the name of fairness, of course.

Higher rate taxpayers have a big advantage in the pension game. So far the Coalition has steered clear of removing some or all of that advantage.

But this research gives a little extra push to the argument that this is a cherry ripe for the picking.

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