Shadow Chancellor Ed Balls has proposed a cut to tax relief on pension contributions for high earners, to help speed up the process of eliminating the country’s deficit.

Joined at a press conference by Labour leader Ed Miliband, Balls produced research from the House of Commons Library indicating the government’s changes to the previous pension tax regime have resulted in an effective tax cut of £1.6bn to those earning over £150,000.

The last Labour government introduced a regime whereby those earning more than £150,000 would only be able to claim 20 per cent tax relief on pension contributions rather than 50 per cent.

The measure was intended to raise £4bn per year, but was reversed by Chancellor George Osborne in the 2010 budget.

Instead of the lower tax rate, the government intended to recover the £4bn through reducing the cap on annual pension contributions, from £255,000 to £50,000, and the lifetime allowance from £1.8m to £1.6m.

Balls said the £1.6bn ‘tax cut’ was greater than the additional £1.3bn the new top rate of tax was estimated to raise in the first year.

“It shows just how out of touch this government is, that with all the pressures on lower and middle income families in our country, it is the very highest earners who have benefited most from their pension tax changes,” Balls said.

The Shadow Chancellor suggested reducing the rate at which top rate taxpayers can claim tax relief from 50 per cent to 26 per cent would reverse the changes made in the 2010 budget, freeing up funds to provide assistance to low and middle income workers.

Hymans Robertson partner and tax expert Chris Noon said limiting tax-relief on pension contributions to the basic rate would deliver the highest immediate funding boost to the government, though agreed with the government’s assessment that such an approach could have a negative impact on pension saving.

Any move to scrap or reduce higher rate relief would be the end of effective private sector pension provision in the UK, Noon said.

“There has to be an end to the practice of raiding pension savings for revenue raising. All this is doing is storing up problems for the medium to long term as people switch off from saving – this will increase reliance on the state.

“The consequences of only providing basic rate relief on pension contributions need to be thought through properly. In effect, the government would be forcing people to limit pension saving to a point that ensured they weren’t higher-rate tax payers once in retirement (i.e. a maximum pension of c. £42,500 per year). If people breached this limit, there is a possibility that they would pay an effective rate of tax of 60 per cent to 80 per cent on this incremental pension saving,” Noon said.

Share Story: