The Treasury is understood to have drawn up plans to slash the rate of relief for higher earners from 40 percent to 20 percent. The move would raise £10billion a year.
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Currently, higher earners get 40 percent tax relief on pension contributions, while lower earners are eligible for tax relief at the rate of 20 percent.
However, the proposed changes would mean everyone would instead get 20 percent pension tax relief.
According to a report in the Financial Times, former Chancellor Sajid Javid was not entirely convinced by the plan.
Downing Street has refused to comment on plans for the Budget.
Emma King, a pensions Partner at Eversheds Sutherland, said: “The pensions industry has been asking for the tax relief system to be simplified for some time.
“Cutting higher rate tax relief to 20 per cent for higher earners would simplify the position somewhat and simultaneously boost the Treasury’s coffers, so may be seen as a win/win for the Government.
“However it will not be a popular move amongst high earners who would see their pensions tax relief halved overnight.
“One way to provide some level of compensation for this group would be to change the annual allowance (AA) thresholds – the potential removal of the tapering relief for DC contributions so high earners can pay more into their pension pots, while for DB pension members, the AA could be removed completely – just leaving the lifetime allowance thresholds.”
Steven Cameron, Pensions Director at Aegon, explained what a change in the system could mean.
He said: “Currently individuals receive tax relief at their highest marginal income tax rate on their personal contributions, so moving to a flat rate somewhere between basic and higher income tax rates would be good news for non-taxpayers and basic rate taxpayers, while higher and additional rate taxpayers would see their Government top-ups reduced.
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“In terms of simple appeal, a flat rate relief of 33 percent would see the Government add £1 for every £2 from individuals.
“But if set below 30 percent, higher rate tax payers expecting to pay higher rate tax in retirement might find pension saving unattractive, undermining the success of automatic enrolment which ‘works’ because pension saving is in virtually everyone’s interest.
“Simply removing higher rate relief and granting 20 percent 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’.
“While there are benefits in flat rate relief, when the Government considered such changes back in 2015, it found there are many complexities to consider, and unless these are thought through and solved, changes could do more harm than good.
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“The three biggest areas of complexity relate to the tax treatment of employer contributions, how to avoid a ‘salary sacrifice loophole’ and how to apply such an approach to defined benefit schemes.
“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.”
Amid reports of HM Treasury cutting tax breaks to higher rate tax payers, Kay Ingram, Director of Public Policy at national financial planning firm LEBC, summarised the Group’s view.
Ms Ingram said: “The current system of marginal rate income tax relief on pension savings is fair to all taxpayers, who pay no tax on income paid into a pension, but who pay tax on the pension income they subsequently draw.
“Any change which restricts the rate of relief to a flat rate, or the basic rate, will hit middle aged middle earners hardest; it is likely to result in less being saved for retirement and many people forced to work longer.
“This cohort of 38-55 year olds earning above £50,000 are less well prepared for retirement.
“They did not have the advantage of defined benefit pensions to the same extent as older workers, and unlike younger workers, were not offered auto enrolment at the beginning of their careers.
“Their pensions will be largely dependent on investment returns. Guaranteed rates of return are much lower as a result of low interest rate policies, so a higher level of savings is required to achieve an acceptable retirement income.
“Their state pension age has been raised to 67/68. To remove higher rate tax relief at this stage would make it even harder for them to retire and is a step too far given that the annual and lifetime allowances already restrict the amount of relief any individual may claim.”
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