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Will the Government Cut Tax Relief for Pension Contributions?

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As it becomes increasingly likely that at some point in the not too distant future the Government will reform the current tax relief system, Stuart Price, Partner and Actuary at Quantum Advisory in Cardiff, looks into the options and possible repercussions.

Stuart said:

“Currently, the Treasury provides 20% tax relief on pension savings for basic rate taxpayers, 40% for higher rate taxpayers, while additional rate taxpayers receive a generous 45%. This complex system of giving tax relief at people’s marginal income rate costs the Treasury around £38bn a year.

“It is being suggested that the Government may opt to update the system by offering either a single flat rate of 20% for all savers which would save the Treasury around £13bn a year, or a single flat rate set at 30% which would be broadly cost neutral.

“While there will certainly be losers in this single flat rate tax relief system, namely the higher tax rate-payers not currently impacted by the Annual Allowance, it is my belief that simplifying the system can only be a positive move.

“The suggested step could remove the requirement for the Annual Allowance which compounds the move towards a simpler system, as undeniably in recent years the entire pensions landscape has become more and more complex for people to understand and for the pensions industry to administer.

“Offering the greater value of 30% would make pension saving more beneficial for the less well-off and therefore should work as an incentive to encourage more people to invest in their pensions. If the 20% rate for all scenario comes into fruition, it has been mooted that the profits could be used to fund national insurance cuts for younger workers. For the cynical, this could be seen as a cunning ploy for the Government to reengage with younger voters, but it would nonetheless help out a generation plagued by increasing student debt and a never-ending struggle to get a foot on the property ladder.

“Overall, it remains to be seen if the Government will introduce such a far-reaching policy but, given the economic benefits of moving towards a different tax relief system, I’d recommend pension savers prepare themselves for such changes in the not too distant future.”