3rd July 2015
The odds of a cut in pensions tax relief have increased after the government published a paper looking at the merits of a reform.
Yesterday afternoon a briefing paper was published on the House of Commons Library titled ‘restricting pensions tax relief’ looking at proposals to cut the relief on contributions for higher earners.
This has further fuelled speculation that relief could be cut in next week’s summer Budget. In its pre-election manifesto the Conservative party said it would restrict relief for those earning £150,000 a year.
The plan is to reduced the annual allowance given to the wealthiest each year – currently everyone can save £40,000 a year with tax relief. Under the new plans, for every £2 earned over the £150,000 threshold, the annual allowance will reduce by £1 meaning those earning £210,000 will have an annual allowance of just £10,000.
Tom McPhail of Hargreaves Lansdown said that publication but ‘may just be coincidence’ but the ‘publication of this paper increases the odds that the government is planning to make further changes to pension taxation in the Budget next week’.
‘The UK’s pension system is still very much a work in progress and with so many radical changes already underway, further reform is inevitable,’ he said.
‘For the sake of all investors, young and old, modest or wealthy, we would like to see a system of pension taxation which encourages saving and investing and which rewards people for taking responsibility for their own retirement. We need to see a stable, long-term settlement which helps the UK to build good levels of retirement savings.’
McPhail said his biggest concern is that the government will cap tax breaks for higher earners which ‘would do nothing for the vast majority of the population except make the pension system marginally more complicated that it already is’.
He added that while it seems unfair that the highest earners receive the most tax relief – as relief is linked to the highest rate of income tax you pay – they ‘also pay most of the income tax in the first place’.