Speculation on incoming higher-rate pension tax relief consultation intensifies

A government consultation on scrapping higher-rate pension tax relief is rumoured to be being launched tomorrow (23 March), as it seeks to find a way to balance the books.

If true, the rumoured consultation is expected to propose capping pension tax relief for those earning over £50,000 at 20 per cent.

Pension tax relief reform has been through the rumour mill several times in the past few years, but it has been suggested that the economic gap caused by Covid-19 has finally prompted the much-speculated move.

Approximately £40bn a year is spent on pension tax relief, with a large proportion going to defined benefit (DB) schemes in the public sector.

According to AJ Bell, a DB scheme member earning £50,000 could be hit with a tax bill of £3,744 if pension tax relief is capped at 20 per cent.

AJ Bell chief executive, Andy Bell, said that, due to the financial impact of the pandemic, it was “no surprise” pension tax relief is now “firmly in the Chancellor’s sights”.

He added that although he could see why removing higher-rate tax relief on pensions might be “attractive” to the government, the reality is “fraught with complications”.

“Removing higher-rate tax relief could result in additional tax bills for millions of ‘middle Britain’ workers, which will be politically toxic when people realise what it means for them,” Bell continued.

“There is a perception that it will only affect the very wealthy, but anyone who is employed and earning over £50,000 could easily be affected if they are receiving employer contributions to a defined contribution (DC) scheme or are in a DB scheme.

“The impact would be most painful for people in public sector DB schemes and the sad truth is that this would include front-line NHS and emergency services workers who have worked so hard to help the country through the Covid-19 pandemic.

“If the Treasury thought the anger caused among NHS doctors by the tapered annual allowance was bad, that will pale into insignificance compared to the mutiny we are likely to see if higher-rate pension tax relief is scrapped altogether. 

“Furthermore, despite the early success of automatic enrolment, average retirement savings levels in the UK remain far too low.

“The preference of successive Chancellors to cut retirement savings incentives and over-complicate the tax system risks undermining these vital reforms and putting an entire generation off saving for their financial future.”

However, PensionBee welcomed the rumoured consultation, saying that it favoured a flat rate pension tax relief of 25-30 per cent.

“Tax relief is a vital incentive that encourages people to save efficiently towards their retirement and too many people continue to miss out on this crucial benefit,” said PensionBee CEO Romi Savova.
“Research shows that consumers on lower incomes, and particularly women, do not receive any of the tax benefits that come with pension saving, because they are currently under the basic rate threshold. While at the other end of the spectrum, PensionBee analysis found that higher and additional rate taxpayers are likely to be missing out on around £1bn in unclaimed tax relief each year by not completing their self-assessment. 

“The dual system is too complex and radical reform is long overdue. A universal rate will level the pensions playing field and put a stop to consumers across all tax brackets missing out.”

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