MPs call for urgent reform of ‘entire approach’ to pension tax relief

The Treasury Committee has called for Chancellor, Rishi Sunak, to “urgently” reform the government’s “entire approach” to pension tax relief.

In its Tax after coronavirus report, MPs stated that the “regressive” nature of the benefits accruing to savers from the current pension tax relief arrangements meant that wholesale reform was needed.

The committee noted that the issue especially affected those in the top earnings decile.

Pension tax relief is the second most costly tax relief, according to the committee, and was estimated to have cost £20.4bn in 2018/19.

MPs argued that reducing the cost of pension tax relief could make a “significant contribution” to public finances in the aftermath of Covid-19.

The committee said it received varied opinions in evidence on pension tax relief, with some being supportive while others called for it to be restricted.

“These are politically and economically sensitive matters in which it will be difficult to achieve consensus and in which technical issues of various disciplines interact with political choices,” stated the Chartered Institute of Taxation.

“People have expectations developed over many years and it is clearly undesirable to ‘chop and change’ too often. However comprehensive, public, consultative review seems overdue.

“This does seem worth revisiting in current circumstances. It may also offer a way of addressing the absolute tax breaks inherent in the current system, without needing to ‘attack‘ one or more of them on an isolated basis.

“No doubt there were good reasons for the thumbs-down given to the earlier consultation but since then we have had the Covid-19 crisis and the partial retreat in the 2020 Budget from the piecemeal complex measures taken over the last 12 years to reduce the weighting of benefits in the system toward the higher paid.”

A previous Treasury Committee had called on the government to improve the system through “incremental changes”, including replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.

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