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.

Pension reforms delayed

Small firms are to be given more breathing space to enrol millions of employees into workplace pensions, a delay which will allow them to put off the cost of making contributions.

The Department for Work and Pensions said that firms with fewer than 50 employees will get more than a year extra to comply with the new rules, which oblige them sign up staff for pensions unless they opt out.

They had been due to start from Spring 2014. The deadline has been moved until after the next election in 2015.

"Making staff in small businesses wait even longer before they get the right to an employer contribution to their pension is a grave disappointment", said TUC General Secretary Brendan Barber

The National Association of Pension Funds had warned that putting off the scheme would be highly damaging. Workers in small businesses are the least likely to be covered by existing pension arrangements.

Firms will eventually have to contribute at least 3% on top of each employee's salary and the employee at least 4%. Tax relief would take the total contribution to a minimum of 8% of pay.

The biggest companies will have to meet the auto-enrolment rules from October next year, as before.

"We recognise that small businesses are operating in tough economic times so we are softening the timetable for implementation to give them some additional breathing space," said the Pensions Minister, Steve Webb,.

He added that all businesses remain "in scope" to be covered by the new rules.