Cutting pension tax relief alone is unlikely to pay for Liberal Democrat demands to increase the personal income tax allowance to £10,000 in next month’s Budget.
Recent reports suggest the Treasury is exploring ways to cut pension tax relief for higher-rate taxpayers to pay for an increase in the income tax earnings threshold from £8,105 to £10,000.
Standard Life says this would cost the Treasury £9.3bn and no single cut in pension tax relief would save the Government enough money to pay for the increase.
Scrapping higher-rate relief for all, as the Liberal Democrats proposed in their pre-election manifesto, would save between £5bn and £7bn while removing higher-rate relief for people earning more than £100,000 would save £3.6bn.
Reducing the annual allowance for tax privileged pension saving from £50,000 to £40,000 would raise £600m. Reducing this by a further £10,000 to £30,000 would raise between £1.6bn and £2bn.
Standard Life head of pensions policy John Lawson (pictured) says: “None of these measures raises £9.3bn, so the Government would have to use a combination of measures to increase the personal allowance to £10,000.”
Lawson says the Government could scrap salary sacrifice on employee contributions, saving £2bn, or remove National Insurance contribution relief for employer and employee contributions, saving £8bn.
Alternatively, Osborne could reduce the annual allowance to £30,000 and use the extra money to fund a more moderate £370 increase in the 2012/13 income tax threshold to £8,475.