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Government may scrap higher-rate pension tax relief

The Government is considering scrapping higher-rate pension tax relief, according to a report in the Sunday Telegraph.

Scrapping higher-rate relief was advocated by the Liberal Democrats before the general election and was considered by the Government before it decided to cut the annual allowance from £255,000 to £50,000 instead.

The report suggests Chancellor George Osborne is looking again at cutting higher-rate relief as he struggles to cut back the public purse.

Scrapping higher-rate relief could save the Government £7bn each year.

The Sunday Telegraph suggests some Conservative MPs believe scrapping higher-rate relief could be the first step of a radical plan to cut all pension tax relief, except on employer contributions, saving the Government £22bn annually. It suggests some of this saving could be used to boost the basic state pension.

The paper says a growing number of Conservative MPs believe the Government may U-turn on plans to scrap child benefit payments to couples with at least one higher-rate taxpayer, meaning cost savings were needed elsewhere.

Michael Johnson

Writing in the same newspaper, Michael Johnson, who worked as an adviser to the Conservative’s 2007 economic competitiveness review, argues it is time to scrap higher-rate tax relief and the 25 per cent tax-free lump sum payment and merge the Isa and pension regimes with a single annual allowance of around £40,000.


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There are 20 comments at the moment, we would love to hear your opinion too.

  1. Government may scrap higher-rate pension tax relief ….

    who are probally mainly Tory voters!

  2. I’ve never heard so much drivel. Higher rate tax relief on pensions is one of the few perks that some of the over tax burdoned middle classes actually enjoy. It seems to me that we are turning in to a bit of a Robin Hood state where the rich are robbed to give to the poor all the time. The loss of higher rate relief will inevitably lead to a reduction in pension provision and the government may shoot themselves in the foot as they siphon a lot of tax off accumulated pension funds.

    Total nonsense……

  3. Thinking about the pensions picture in the near future. You will be left with semi-compulsory pensions provision where the poor will see no benefit because of the combination of low contirbution rates and relatively high charges and no higher rate tax relief benefit for those who are better off. Plus nobody will any longer have the incentive/benefit of a tax free lump sum at retirement.

    If legislation had to seel itself, who would buy??

    If this proceeds, I will certainly be opting out-but then again I am in the fortunate position where I will be able to afford my own advice in order to make sufficient alternative provisions for my later years!

  4. At a time when the population is asked provide more toward thier own pension provision this sends an inconsitent message… for your pension but we will only give the full tax relief to those who pay lower rate tax, if you pay higher rate tax we wont give full relief. and if you don’t bother to save at all then not to worry the tax payer will pick up the tab.

    It’s a continuation of the middle class squeeze. Do they not realise this this the backbone of the earning population who are paying a higher propotion of tax and recieving little in return. these are the investors, the people who get up at 5am and ‘travel’ to their jobs. These are the people who are increasingy wondering why the bother and are now starting to use savings and investments for everyday living…the same savings and investments being tucked away for retirement.

    The pips are starting to squeek, investments are down, encashments are on the increase. The best way to kick start the economy is to allow the population to have more of it’s own money to spend….counter intuitively it is to tax less.

    The hard working, tax paying worker is an easy target. this will have the effect of a further reduction is personal liquidity as the shortfall is made up by the individual or the overall value of the pension is reduced at retirement.

  5. Treasury letter to George

    Hi George,

    Higher relief costs the Treasury £7 Billion a year. Clobber this and no one will go on strike and the idiots will still vote Tory

    Public sector pensions liabilities now exceed £1 TRILLION and climbing but if you clobber this it will be everybody out, Nasty Tories and all that and you will be stuffed at the next election.

    oh and by the by Quangoes cost still £100 Billion a year but you can’t hit these as the little luvvies won’t vote for you either.

    Much better to stick to hitting the good old private sector.

  6. This will be the death knell for private pension saving for the majority. No tax relief, or no tax free cash is no incentive to save for retirement in an inflexible contract like a pension plan. Looks like the only alternative will be to become a MP as you can be absolutely certain that any of the changes proposed above will have no impact on that community..unless we really do have turkeys voting for Christmas!

  7. I suppose this so called Tory led government needs the extra cash from stopping higher rate relief to help bail out Grece Ireland Portugal etc. It sure looks like Lib-Dem policies win again

  8. Trevor Johnston 20th June 2011 at 9:52 am

    I believe to many here are focusing on higher rate relief. Of greater significance is the comment that they may consider cutting all tax relief, except on employer contributions. Surely then we should not be taxed on the income, or certainly the element of the employees contribution.

  9. We are now to be governed by a coalition of losers when this fails as surely it will we face another election but how will we know a Tory from a Labour politician? We have already seen Mark Hoban MP embrace Gordon Brown’s FSA RDR and now the abolition of higher rate tax relief will follow on from Brown abolition of dividend tax relief for pension funds. A policy that cost our pension schemes tens of billions of pounds and signaled the end of private sector final salary pensions (but not public sector final salary pensions which continue unabated). So now we must ask why would anyone actual want to fund into a pension? Ok you get basic rate tax relief but the fund is no longer tax free and in payment its taxed again, and at death again!

  10. Tax relief is a carrot and auto-enrolment a stick. Scrapping higher relief was always an option for governement.
    But if they are worried about the effect of reducing Public Sector pensions whos members are not generally Tory voters, they should be very very very scared of the quiet majority who will vote with their feet rather than march on their feet.

  11. David Trenner - Intelligent Pensions 20th June 2011 at 11:11 am

    A man no-one has heard of writes a piece in the Torygraph and everyone behaves as if it is already legislation!!

  12. So it’s OK for the lower paid to get basic rate relief but people who can better afford pension contributions should have more incentive? Which planet are you living on?

  13. What about doing the same with buy to let mortgages?

  14. Steven Farrall (Adviser Alliance) 20th June 2011 at 12:24 pm

    An excellent idea. Couple it with scrapping all public sector DB schemes, and putting them all in DC schemes and we can save shed loads of cash both now and in the future.

  15. Sitting here wondering what next! Pensions are never going to win any popularity contest but is there now a requirement for confusion and change to take over from planning and budgeting. More pension and finance acts than ever, workplace pensions, CARE schemes, auto enrolement, annual allowances, tax relief……………………………

  16. Tax releif on pensions, whetehr at basic rate or higher rate is NOT a tax perk, it is simply saying you will only be taxed on your income ONCE, so if you defer drawing that income i.e. have it direcetd in to a pension, it is only taxed when you later try and draw it (and at the rate applicable WHEB you draw it).
    Removal of higher rate tax relief means that a person could be taxed 40 or even 50% on their earnings and then be taxed AGAIN at whatever rate the government at the time of their retirement deems to be fair.
    Removing the ability to draw a pension commencement lump sum tax free is oen thingg as that is an invcentive to save and whilst it will send a negative message, it is not morally wrong, but removing tax relief, whether that be at higher rate or basic rate is morally wrong. No one should be taxed twice on the same earnings and hence why would anyone want to put any money in to a pension every again? People would end up wanting to stick it under the mattress, at least they could only be taxed on it once then!

  17. Sounds rather socialist to me – politics of envy.

    If they start scrapping tax relief I might stop contributing to a pension myself, start spending everything i earn and let the state care for me in my dotage just like a large majority of the country.

  18. Sean – you talk about ‘politics of envy’ A bit like the ongoing attacks on the ‘gold plated DB schemes in the public sector then.

  19. With auto enrollment the current proposal is 3% employer contribution/ 4% employee contribution and 1% from the Govt in the form of tax relief to the employee. Scrapping tax relief on pensions would certainly knock a hole in the setting up of the new pension world.They need to make this work otherwise pension world is bust.

  20. Mark | 22 Jun 2011 3:14 pm

    The issue with gold plated public sector pensions is that they are underwritten by all taxpayers – many of whom dont have access to a final salary pension themselves.

    I personally was a member of a final salary pension scheme provided by an employer. We were given three choices 1. Increase your contributions to maintain benefits 2. Join a defined contribution scheme 3. Cease contributions. We didn’t have the benefit of being able to hold out our hands to the taxpayer so had to like it or lump it.

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