Tory MP calls for salary sacrifice cap in radical savings overhaul


A Conservative MP has called for a £10,000 restriction on salary sacrifice and a new 30 per cent flat rate of pension tax relief to deliver £10bn in annual savings for the Government.

Work and pensions committee member Craig Mackinlay proposed the reforms ahead of Chancellor George Osborne’s own plans for tax relief, due to be revealed in the March Budget.

He says a 30 per cent rate of tax relief would bring pensions in line with tax rates in other parts of the system and encourage contributions from basic rate taxpayers. The Treasury is understood to favour a lower flat rate of 25 per cent.

Mackinlay is also urging the Chancellor to bring in a ceiling of £10,000 on salary sacrifice, with further contributions coming under the remit of avoidance legislation.

He describes the plans as an evolution of the current system. He also proposes new rules on tax-free lump sums, which would be limited to either 25 per cent or £50,000, whichever is smaller.

The South Thanet MP also calls for the first £5,000 of pension income to be tax-free up to the higher rate threshold, extending freedom from tax to a larger number of pensioners.

Mackinlay says the changes may reduce large pension contributions by higher rate taxpayers, but with basic rate taxpayers showing greater take-up.

He says: “Overall, I estimate an additional annual saving to the public purse in restricted tax reliefs borne particularly by higher rate and additional rate taxpayers to be in the order of £10bn per year.”

Adviser View

Peter Chadborn, director, Plan Money

I am not against having caps and limits like a lifetime allowance or an annual allowance, but when the caps are made relatively low, then it’s sending out mixed messages.On one hand we have auto-enrolment being forced on employers, and for good reason, but if you are putting restrictions on that, then it is almost a disincentive to save, and it is adding further complications. We want to be simplifying this process, not adding even more variables.