Rumours suggest that Sajid Javid’s budget on March 11th is set to reduce the amount of tax relief offered to higher earners on their pension contributions.
Those inside the Treasury intimated to the Financial Times that the Chancellor is looking into ways of saving money and drastically reforming pension tax relief has been deemed as a front runner.
As part of the reforms, Javid may propose halving the relief for higher earners from 40% to 20%.
It is thought that the current system whereby higher rate taxpayers receive 40% or 45% pension tax relief costs the Government around £40 billion in lost tax revenue.
The cabinet is tempted by the potential recouping of £10 billion per year following the changes.
Experts claim that the reforms could result in short term damage to the treasury as investors make the most of the relief while it is still available.
HM Treasury, commented:
“We don’t comment on speculation. All taxes are held under review and any changes are announced by the Chancellor at the Budget.”
Tom Selby, Senior Analyst at AJ Bell, commented:
“Altering investor behaviour could damage confidence in the stability of the system
“Ironically, in the short-term such stories will inevitably cost the Exchequer cash as savers pile into pensions to make the most of tax relief while it is still there.
“If there are to be reforms to the pension tax framework, they must not risk harming the fragile savings culture that is being developed in the UK. We believe the focus at the moment should be improving the existing system rather than burning the whole edifice to the ground.
“Savers should be confident the product they commit their hard-earned cash to for decades won’t be subject to constant change. If there is to be further reform to pensions taxation, we urge the Government to take a genuinely long-term approach by committing not to make further changes for at least 10 years.”
Steven Cameron, Pensions Director at Aegon, said:
“Simply removing higher rate relief and granting 20% relief to everyone would not affect basic rate pension savers but would severely dent the attractions for higher rate taxpayers many of whom are far from ‘wealthy’.
“Rushing to cut pensions tax relief could do long term damage to UK retirement savings so we urge the Chancellor and his team to avoid going too far, too fast and instead to engage with the industry to resolve issues. We also recommend testing any new approach with savers to understand how it might change retirement savings behaviours.”
