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Why Treasury took relief road

Financial experts say that scrapping higher-rate tax relief on pensions for high-earners in the Budget was an unnecessarily complex move and simpler measures could have been taken.

Speaking at a Treasury select committee Budget inquiry on Monday, PricewaterhouseCoopers tax partner John Whiting asked why the Government had not simply reduced the annual pension contribution limit to clamp down on the tax relief that high-earners get on their pension contributions. He said this would have been a preferable and simpler alternative.

Institute for Fiscal Studies director Robert Chote cited the Turner pension review which said the only practical way to limit tax relief to high-earners to distribute it to lower-earners would be to cut the £1.8m lifetime allowance.

In a separate evidence session on Tuesday, Treasury select committee member Graham Brady asked Treasury staff why this action had not been taken.

Treasury personal tax and welfare reform director Mike Williams said: “We looked very carefully at whether that was a viable way of restricting the amount of pension tax relief at the top end. There are two reasons as to why the option is not as good as it looks, prima facie. The first reason, and I think most crucially, is if you do significantly reduce the lifetime allowance, actually you are, in some circumstances picking people much lower down on the income scale.

“If you apply the existing lifetime allowance, it creates difficulties if you bring it down significantly in terms of people working out if they are up against the lifetime allowance or not. There is an extent that what we have got works because it does not affect that many people.”

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