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Treasury cools talk of pensions tax relief reform

Treasury financial secretary David Gauke has cooled talk of pension tax relief reform under the Conservatives and put himself at odds with his Liberal Democrat coalition partners.

Speaking at a fringe event at the Conservative party conference in Birmingham today, Gauke rejected equalising pensions tax relief at a lower level and suggested the Government had done enough to cut relief for higher earners.

The Government has reduced the lifetime pensions tax relief allowance from £1.8m to £1.25m as well as cutting the annual allowance to £40,000.

Pensions minister Steve Webb has called for a review of Liberal Democrat policy, suggesting a new equal pensions tax relief level below 30 per cent should be set.

Last year the Treasury opened a debate on pensions tax relief after a significant Pensions Policy Institute report laid out options for reform.

But Gauke said: “There are two questions to be asked when we talk about equalising the relief. Firstly, will it encourage greater saving from basic rate taxpayers? And secondly, if lowering the relief for lower and additional rate taxpayers is your objective then is it the best way of achieving that?

“The answer to both of those questions is that it is not clear the answer is yes. There is a question about whether you get good value for money by incentivising savings for basic rate taxpayers by increasing tax relief. The evidence suggests it probably wouldn’t so the cost is largely dead weight.

“As for restricting the cost for additional and higher rate taxpayers, it is worth pointing out that we have done a lot on that with restrictions on the lifetime and annual allowance. Those tools have been pretty effective in terms of finding savings for the general taxpayer without undermining our pensions tax system overall.

“My response to equalisation is that I question it achieves either of the objectives people hope it would. I can see why the point is raised and why there is a debate but I am not sure it does what people want.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Not everyone benefits from even their marginal rate of tax relief on pension contributions.

    An employee in the basic rate band making contributions from net income has at best a true rate of relief of 6% when personal NIC is removed from the HMRC rebate.

    Add to that the employers NIC cost and the truth of the matter is: contributions into the pots of a basic rate taxpayer, from net pay deductions are actually taxed at 10%.

    I could go on….

  2. David: That sounds like semantics. You don’t pay NIC on pension income. So 20% tax relief for a BRT paying 20% tax in retirement is, theoretically, tax-neutral.

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