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Govt moves towards flat rate on pension tax relief

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The Treasury has moved away from a radical move that would see pensions taxed like Isas in favour of the industry’s favoured flat rate of relief.

Chancellor George Osborne is believed to be designing a “hybrid” model with a flat rate set between 25 and 33 per cent, the Financial Times reports.

A consultation launched last year proposed alternatives to the model of pensions tax relief. It is widely agreed setting relief at the same rate as income tax unfairly favours higher and additional rate taxpayers.

The most radical shift was to a taxed-exempt-exempt system where contributions are taxed on the way in and tax-free when taken as income.

But the industry has repeatedly warned introducing the Tee model would be hideously complicated, particularly where it applies to defined benefit pensions.

A hybrid system would give a Government top-up but this would come after the post-tax contribution had been made and pension payments would still be taxed.

Setting the flat rate at 25 per cent is expected to save the Treasury £6bn a year.

Tax relief costs the Government around £50bn a year in lost income tax receipts and National Insurance contributions.

The Government has also signalled its intent to crack down on salary sacrifice arrangements that minimise employer and employee Nics.

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. “Setting the flat rate at 25 per cent is expected to save the Treasury £6bn a year.”

    Okay ~ but how much extra will raising it from 20% to 25% for basic (and presumably zero) rate tax payers cost? If that figure is more than £6Bn p.a. nothing will be saved. It may cost the Treasury more than £6Bn p.a.

    So, is the plan to reduce the overall cost to the Treasury of the present tax relief system or is it to encourage basic (and zero) rate tax payers to contribute more to their pension plans?

    My view on allowing HR payers tax relief at their highest marginal rate is that it’s not unfair at all. Just like BRT payers, HRT payers have a choice ~ they can either keep (and spend) those earnings and pay tax on them (VAT as well as income tax) or they can pay them into their pension plan/s and shelter them from (immediate) tax. It seems manifestly unfair for HRT payers to be penalised with a rate of relief that’s not aligned with what they’d otherwise have to pay if they didn’t allocate those earnings to their pension plan/s.

  2. Most voters won’t have a clue about the hit higher earners will take with these proposed changes and the changes in the LTA.

  3. Why doesn’t he scrap the Treasury’s & MP’s current pension scheme as well while he is at it and replace with a NEST AE scheme. That would surely save a few more £bn and it might even allow NEST the ability to repay that huge DWP loan a bit quicker.

  4. “It is widely agreed setting relief at the same rate as income tax unfairly favours higher and additional rate taxpayers”. Is it really? Where is the evidence that marginal rates of income tax for high earners are any lower than anyone else’s? How is it beyond comprehension (apparently) that those who pay most tax also benefit most from tax relief? What we are moving towards here is high earners, innovators and those most capable of running profitable businesses subsidising tax reliefs for others. I doubt if they will buy into that “wide agreement”. On the plus side, thank goodness the T.E.E. disaster has been averted.

  5. Simply not true that it is ‘widely agreed setting relief at the same rate as income tax unfairly favours higher rate tax payers’. ….just because the government keep saying it doesnt make it true.
    Stop peddling this nonsense. just admit the reason is you (the goverment) want to save money.

    Tax relief on pension contributions isnt broken. Meddling yet again will break it.

    I will just go to my boss and say I want a different salary package and a new contract. I want a lower salary and the company to pay more into my pension……….so I can get the equivalent pension an MP gets.

  6. So impute capped at £40K, life time allowance reduced to £1 million and now removal of higher rate relief likely. This is about saving money. I note no one is suggesting winding up public sector final salary pension benefits, which is building the biggest future liability to our nation. Funny we are all in it together until the MP’s and public sector is suggested to forgo what most had removed in the private sector due to cost a decade ago.

  7. Oh dear. The numpties are at it again. Of course Julian is right. However if you either run your own firm or work for a flexible and accommodating SME there is always salary sacrifice. This of course is entirely undetectable. You decide not to take the £5k rise, but have it put into your pension by the firm. Under current rules you save tax at your highest marginal rate and your employer and you save NI.

    Most people don’t earn over £100k so for any salary up to (say) £90k the thieves at the Revenue are none the wiser that the contribution is salary sacrifice. Of course this is assuming that you don’t have a naff AE plan and have sensibly opted out.

  8. This has nothing to do with unfairness & everything to do with raising extra tax revenue. The potential to restrict relief to those paying higher or additional rates of tax is what should be considered unfair.

  9. Michael Sturgess 18th January 2016 at 4:26 pm

    The £6bn “saving” at the 25% rate, one assumes, is the net saving after allowing for the extra 5% cost on behalf of basic/zero rate taxpayers. I haven’t looked at the numbers but would imagine the extra 5% cost of relief at the lower end is dwarfed currently by the 15% saving at the higher end. In my view, the proposed system of setting a flat rate of relief is unworkable in practice and whilst this is no guarantee that relief won’t be tinkered with in this way, I just don’t see it happening. What will Osborne do to the tens of thousands of controlling directors who pay pension contributions through their limited companies? Will they suddenly find themselves taxed at some rate on the employer pension contribution? Certainly possible.

    Similarly, will members of final salary schemes also become liable potentially to an additional income tax charge on the notional value of the employer contribution? Who is going to provide them with the necessary information to put on their tax return? Who is going to pay for the necessary calculations?

    Salary sacrifice, we are told, will be knocked on the head going forward to counter obvious avoidance opportunities. However, if this leaves pre-existing employer money purchase and notional final salary pension contributions unaffected, this would surely be a grotesquely unfair outcome, even for a Conservative Chancellor… Plan for the worst, by all means, but I would be astonished if he followed through with this idea, for the paltry sum of £5bn p.a….

    Mind you, I have been astonished before.

  10. We have what is supposed to be a Conservative Govt behaving like a Labour one… They are really attacking the middle class upwards unbelievable really…

  11. Saving money from Peter to pay Paul – ie criminal investment bankers and cronies. I see Goldman Sachs was hit with a $5.1Bn fine by the SEC for blatant criminal activity – but where are the gaol sentences for those in charge (who might I add, put their cronies into power in the first place)?

    How about chasing the huge multinational firms for their ‘missing’ revenues; chasing these firms conducting what amounts to accounting larceny should be the No1 priority – not meddling with citizens’ pensions. Revolt or emigration seem like the only sensible options, sadly!

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