Government mulls tax raid on top earners’ pensions
According to the Financial Times, chancellor Sajid Javid is weighing up cutting tax relief on pension contributions for higher earners as a way of raising revenue for the state.
Under the current system, individuals receive tax relief on their personal contributions at the same rate as their marginal income tax rate.
However, the FT reports Javid may cut pension tax relief for higher earners from 40% to 20%, raising more than £10bn extra a year for the state.
Inheritance tax and capital gains tax are also under review, according to the paper.
The Treasury told the FT: “We don’t comment on speculation. All taxes are held under review and any changes are announced by the chancellor at the Budget.”
A shake-up of the pension tax relief system has been a long-debated subject since George Osborne commissioned a consultation on its future during his tenure as chancellor.
Tom Selby, senior analyst at AJ Bell, said: “Barely a Budget goes by that the Treasury isn’t rumoured to be eyeing radical pension tax relief reform. This constant speculation risks altering investor behaviour and damaging confidence in the stability of the system.
“Ironically, in the short-term such stories will inevitably cost the Exchequer cash as savers pile into pensions to make the most of tax relief while it is still there.
“If there are to be reforms to the pension tax framework, they must not risk harming the fragile savings culture that is being developed in the UK. We believe the focus at the moment should be improving the existing system rather than burning the whole edifice to the ground.”
Steven Cameron, pensions director at Aegon 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”.
“Rushing to cut pensions tax relief could do long-term damage to UK retirement savings so we urge the Chancellor and his team to avoid going too far, too fast and instead to engage with the industry to resolve issues. We also recommend testing any new approach with savers to understand how it might change retirement savings behaviours.”