Labour leader Ed Miliband has repeated calls for pension relief for higher rate tax payers to be capped at 26 per cent with the extra revenue spent on reversing cuts to tax credits.
Last month, Shadow Chancellor Ed Balls said by reducing the annual allowance from £255,000 to £50,000 instead of reducing relief for those earning over £150,000 to 20 per cent as Labour had planned, top rate tax payers had been given a tax break of £1.6bn. He said capping contributions to top rate payers to 26 per cent would fill that gap.
The sums behind Balls’ claims have been questioned by industry experts.
In a speech in Southampton this morning, Miliband said the Government should use the money to fund reverse cuts in tax credits set out in the Budget.
He said: “We say reverse the £1.6bn pensions tax break the Government has given to those earning above £150,000 a year and use the money to reverse some of the cuts in tax credits. I think that is what Britain would look like if we really were all in it together.”
When Balls originally made the call, Standard Life head of pensions policy John Lawson told Money Marketing the calculations behind Labour’s claim of a tax cut are wrong.
The previous Labour administration planned to limit pension tax relief for people earning over £150,000, including pension contributions, to 20 per cent from April 2011. Chancellor George Osborne instead cut the annual allowance from £255,000 to £50,000 and the lifetime allowance from £1.8m to £1.5m.
Balls claims Labour’s restrictions would have saved £4bn compared with the £2.4bn saving from reducing allowances. He says restricting relief to those earning £15,000 to 26 per cent would save £1.6bn, making up the difference.
Lawson says Balls’ figures for the cost savings associated with Labour’s original plans do not account for Government, employer, employee and pension scheme costs totalling between £2bn and £3bn.
He adds the £20,000 cap on annual allowances for top-earners in 2009/10 and 2010/ 11 created pent-up demand to carry forward contributions and reduced the initial savings from the annual allowance cap.
Lawson says the £2.4bn saving will be nearer the Treasury’s estimated annual saving of £4.5bn in future years.
He says: “Labour’s inefficient plan was already discredited last time round and it looks like they are putting it back on the table. They do not seem to have been listening.”