Javid considers cuts to high rate pensions tax relief

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The Financial Times reported that one idea being considered is cutting pension tax relief for those earning £50,000 or more per year to help prime minister Boris Johnson's spending plans and raise an estimated £10bn extra a year.

Tax relief on pension contributions - which is estimated to cost the government around £40bn a year - is currently offered at the same rate as savers' income tax rate, but the long-discussed changes to the system would see high-earners losing out on a considerable amount of relief at retirement.

The plans are reportedly being considered for the upcoming 11 March budget in an effort to raise more tax from top earners and boost public spending.

The chancellor - who has held the role since July 2019 - has received some scrutiny from industry experts over the proposals, with some suggestions that the change is unnecessary and may create adverse unintended consequences.

Aegon pensions director Steven Cameron urged the chancellor to"consult fully rather than going too far, too fast".

He said,"Simply removing higher rate relief and granting 20% relief to everyone would not affect basic rate pension savers but would severely dent the attractions for higher rate taxpayers many of whom are far from ‘wealthy'.

"While there are benefits in flat rate relief, when the government considered such changes back in 2015, it found there are many complexities to consider, and unless these are thought through and solved, changes could do more harm than good."

He added,"The three biggest areas of complexity relate to the tax treatment of employer contributions, how to avoid the ‘salary sacrifice loophole' and how to apply such an approach to defined benefit schemes.

"Hargreaves Lansdown senior analyst Nathan Long suggested:"The ludicrous proposal to knock higher rate tax relief on the head entirely is exactly the kind of panic change to pension tax relief we don't need.

"The current set of complex rules doesn't adequately incentivise people to save at the right level, instead it merely acts as a subsidy for retirement saving and it needs to change. It's failing the self-employed, lower earners and some higher earners, but I can't see the government making such drastic decisions in the Budget without thorough consultation."

Barnett Waddingham self-invested technical specialist James Jones-Tinsley said if the speculated plans come to fruition, it will"sadly have a negative effect on saving through pensions".

"A flat rate of 20% is simply too low. Yes, it will maximise savings for the government… but it will offer no incentive for basic rate taxpayers to increase contributions to their pensions, while higher and additional rate taxpayers will merely look elsewhere for better tax-relieved savings vehicles," he added.

In August, Aegon revealed Johnson's mooted income tax reforms - which proposed raising the higher-rate tax threshold from £50,000 to £80,000 - would create a double-edged sword whereby income tax ‘winners' would become pension tax relief losers, leaving them receiving basic rate relief instead.

Quilter head of retirement policy Jon Greer said,"A move to a single rate of tax relief would be a bold move, however, any kind of reform needs careful thought and should not just be a political play.

"Moving to a flat rate system could easily be presented as a re-distributive measure aimed at boosting the pensions of lower earners, funded by slashing the pension tax break for those on higher incomes. But it could be a false economy if it discourages overall levels of pension savings and damages the fundamental principle that pension saving is effectively free of income tax."

 

This article was written by Holly Roach from Professional Advisor and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.