The Government is planning a shake-up of pension tax relief to aid spending, but experts have warned it could hit savers
Mon, 02/10/2020 – 11:08
Chancellor Sajid Javid is set to slash the tax relief on pension contributions for higher earners in this year’s Budget, the Financial Times reports.
Treasury insiders have told the FT that Javid is weighing up reforms that would hit higher earners but ease pressure on strained public finances.
The paper says that Javid is considering cutting the rate of pension tax relief for higher earners from 40% to 20%.
Currently, people saving into their pension receive tax relief at the same rate as their income tax rate.
Javid’s allies told the FT that the Chancellor was committed to making the tax system “fair and efficient”.
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.”
Other reforms under consideration include capital gains tax, inheritance tax and entrepreneur’s relief.
Previous plans by the Government to reduce the rate of pension tax relief were scrapped in 2016.
What is pension tax relief?
With pension tax relief, the money that would have gone to the government in tax instead goes towards your pension.
The amount of pension tax relief workers receive depends on their income tax rate.
Higher rate taxpayers get 40% or 45% pension tax relief, while basic rate taxpayers get 20%.
The Government spends millions of pounds a year on pension tax relief, but many people think it is unfair that above-average earners get to benefit.
Pension tax relief costs the government £40 billion a year in lost tax revenue. Cutting pension tax relief for higher rate taxpayers from 40% to 20% could save the Treasury around £10 billion a year.
What do the experts think?
The possible change to pension tax relief has drawn widespread criticism from pension experts who say it could damage pension savings.
Tom Selby, senior analyst at AJ Bell, says the constant speculation about pension tax relief risks altering investor behaviour and damaging “confidence in the stability of the system”.
He says: “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.”
Selby says the lack of clarity about the future of pension tax relief needs to be addressed.
He says: “Savers should be confident the product they commit their hard-earned cash to for decades won’t be subject to constant change. If there is to be further reform to pensions taxation, we urge the Government to take a genuinely long-term approach by committing not to make further changes for at least 10 years.”
Steven Cameron, pensions director at Aegon, says: “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.”