Pension Tax Relief

Fancy a 30% flat tax relief on your pension contributions?

In 2006 the previous government introduced what it described as ‘pension simplification’, a radical reworking of the pension tax rules. Ever since, there has been a process which has now gained the label of ‘complification’ – adding complexity back into the pension tax system. The current government can take a fair slice of the blame, with its efforts to cut back the cost of tax relief by twice reducing both the lifetime allowance (on total benefits) and the annual allowance (on contributions).

A recent paper from the Pension Policy Institute (PPI) examined who benefits from the current pension regime and highlighted two tax points:

  • Basic  rate taxpayers  are  estimated  to  make  50%  of  the  total   pension  contributions,  but  benefit  from  only  30%  of  pension  tax  relief.  In  contrast,  50% of all  pension tax  relief  goes  to  higher  rate  taxpayers, with the balance going  to  additional  rate taxpayers,  while  these  groups  make  40%  and  10%  of  the  total  contributions respectively.
  •  Currently  77%  of  pension lump  sums by number are  under  £40,000, but  these account for just under a quarter  of  the  tax  relief  on  lump  sums. At the opposite end of the scale  2%  of  lump  sums  are  worth  £150,000  or more and  they  attract  nearly a third  of  tax  relief  on  lump  sums.

The PPI’s concluded that instead of marginal rate income tax relief, a flat rate relief of 30% for everyone would be better at incentivising low and middle income earners and spreading the benefit of tax relief more evenly. It looked at a number of options for cutting back on the lump sum, but concluded that these would have limited immediate effect because any change could not be made retrospectively.

The PPI’s ideas on flat rate relief should not be dismissed as just the musings of another think tank. They echo proposals from the Centre for Policy Studies, a think tank founded by Sir Keith Joseph and closely linked to the Conservatives. The other main political parties have both talked about cutting tax relief for high earners, so the writing may well be on the post-election wall.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

8th August 2013