Chancellor Philip Hammond is said to be favouring a cut in the annual pension allowance over a flat rate system as pension tax relief reform appears to be back on the table.
Pensions are in the firing line after the Government dropped its planned rise to national insurance contributions for the self-employed last week, and needs to find other ways to raise the £2bn in revenue it would have generated.
According to a report in the Sunday Times, Treasury officials will stick to commitments not to increase borrowing, and see few other options than hitting the £25bn in tax reliefs on pension savings the Government gave out last year.
A source close to Hammond told the paper: “That’s what is being talked about. What else is there? There isn’t much else. What else can you do? He’s not going to compromise the government’s reputation on fiscal integrity and we’re not going to be borrowing more. That’s very clear.”
While higher earners do receive greater tax relief on contributions than lower earners, Treasury sources said that that moving to a flat rate of pension tax relief would be seen as an attack on the middle classes.
As a result, Hammond is said to be leaning towards decreasing the annual allowance from £40,000 to either £35,000 or £30,000, and is less likely to look at the lifetime allowance.
Cutting the annual allowance would add to the Government’s previous cut in 2014 and the taper for high earners in 2016.
Aegon pensions director Steven Cameron says: “In the face of a U-turn on NI, the Chancellor may view pension tax relief as a soft target to balance the government books. Doing so might paper over a crack but risks undermining the country’s long-term savings framework. Barely a week goes by without reports of the increasing strain being placed on our social care system. If there’s limited incentive to save for old age, the government will find that a saving now will be met with bigger costs later as fewer and fewer people are able to meet these costs themselves.”