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Coalition set to debate pension tax relief cuts

Chief secretary to the Treasury Danny Alexander has reiterated the Liberal Democrats’ commitment to scrap or further restrict higher-rate pension tax relief.  

In an interview with The Daily Telegraph, Alexander suggests the Government cannot afford to continue with the levels of tax relief offered under the current system.

He says: “If you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate.”

For those with “very large incomes who are paying very large pension contributions….. the country cannot afford to give you all the tax relief”.

A proposal to scrap higher-rate pension tax relief was included in the LibDem manifesto but did not make the coalition agreement.

Instead, the coalition Government announced new restrictions to higher rate relief such as a £50,000 annual allowance, introduced last April, and a reduction in the lifetime limit from £1.8m to £1.5m from this April.

Alexander told the Telegraph that scrapping higher-rate pension tax relief altogether would save the Government £7bn whilst scrapping it for those earning over £100,000 would save £3.6bn.

The coalition will meet this week to discuss tax plans ahead of the March 21 Budget and the Telegraph suggests Alexander will be pushing for those with incomes over £100,000 to have higher-rate relief cut.

Any such move is likely to face opposition from Chancellor George Osborne and Conservative backbenchers.

Alexander also told The Telegraph the LibDems would fight the next election with the commitment to raise the level at which income tax is paid to £12,500. It is current Government policy to look to increase the limit to £10,000. It will increase from £7,475 to £8,105 for the 2012/13 tax year.

Elsewhere, Treasury sources told The Sunday Telegraph that plans to introduce a tax break for married couples, included in the coalition agreement, would not feature in this year’s Budget.

The Telegraph also reports that the Government will consider a new tax avoidance crackdown which would allow HM Revenue & Customs to claw-back money saved from “’artificial’, but currently legal, tax dodges.”

The Sunday Times reports that Osborne is likely to push ahead with his plans to scrap child benefit for couples with at least one higher rate taxpayer with limited concessions for those earning just above the threshold.


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. “artificial, but currently legal, tax dodges”? I thought if a tax dodge was artificial it was automatically evasion! Have I been misled by HMRC? Can we have clarity on this one please someone?

  2. Pension tax relief on contributions is given but when income is taken it is taxed. Therefore if we change the tax relief people get on input we will have to change the tax rate on pension payments – a night mare.
    Compare ISAs no tax relief on the way in & no tax relief on the way out. Pensions are the reverse.

    If people see as mis alignment they will stop saving in pensions – already we have the possibility that basic rate tax may be higher when with drawn than when paid in.
    Imagine if NICs were combined with income tax too !

  3. Rather than stopping people from saving shouldn’t the objective be to encourage everybody to save for their retirements. If a 40% tax payer is contributing more to the public purse then it makes sense that there should be some reward.The negative spiral that this propose action would create would arguably be the final nail in the coffin of pension savings.

  4. Public sector pension liabilities exceed £1 TRILLION

    The Lib Dems answers?

    Lets screw private pensions again.

    The Quango bill is probably still in excess of £80 BILLION a year

    The Lib Dems answer?

    Lets screw private pensions again.

    We are spensing BILLIONS a year on wars

    The Lib Dems answer?

    Lets screw private pensions again.

  5. Dennis Burling ACII APFS, Chartered Financial Plan 13th February 2012 at 9:21 am

    Once again the same old chestnut !!

    The government must realise that as pensions are such poor value for money on the way out, no-one with any sense is going to want to put any money in at all uness they get higher rate tax relief – I certainly wouldn’t these days !!

    If this is removed, for whatever reason, then poeple will simply opt out of pensions altogether which will in turn then place even more burden on the state later on.

    What are these politicians on – sheer stupidity !!???

  6. The Blair/ Brown/ Coalition years have led me, a pensions adviser, never to put a single penny near a pension plan. I do other things to save for retirement none of which Mr Alexander will be meddling with. Why do our Govts have an agenda to extinguish pension saving in the UK?

  7. Regardless of the merits or otherwise of the proposals – this is just adding to the constant rule changes which in itself is becoming a bigger disincentive to saving within a pension.
    Surely the taxpayer actually gains from encouraging saving within a pension because, PCLS and draw-down apart, the benefits paid include the return of the capital but it is all taxed as income.

  8. So here we go again Lib Dems telling the Conservatives what to do. I wonder what there answer will be when someone points out that defined benefit contibutions from companies get aupto 30% tax relief and the ordinary man in street paying into PP will get 20%. Time Cameron decided whether he is a Tory or not so we can all vote accordingly in 2015

  9. How will they stop directors getting effective 40% relief if the company pays the contribution. Will they restrict corporation tax relief. If so this will have a massive effect on schemes for large group Schemes. As a director of a small company I would simply switch to Isas net of CT and not pay tax on any of the income.
    Better they jump on all the Googles of this world and made them pay their far share of tax.

  10. MP’s pension:
    40th accrual (26.6 years service for max pension)
    11.9% personal contribution
    28%(?) Exchequor contribution
    MP salary £65k ish
    PM salary £142k ish
    Speaker’s salary £141k ish
    Don’t suppose they are too worried about losing higher rate relief…why would they be?

  11. This assumes that individuals dont start directing money towards EIS or VCT investments.

  12. Fiddling whilst Rome burns!
    Higher rate relief might cost £7bn but the unsustainable Public Sector pensions are costing UK taxpayers £100s of billions! This is peanuts in comparison.
    Aren’t our politicians looking in the wrong direction?
    Then again perhaps we can’t expect turkeys to vote for Christmas.

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