Personal PensionApr 16 2014

Single rate pension tax relief ‘easier said than done’

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A flat rate of 30 per cent tax relief on pensions for all is an “easier said than done” policy as employers pay more contributions into occupational pension schemes than employees do, Towers Watson said.

David Robbins, senior consultant at Towers Watson, was responding to an interview in the Daily Mail with pensions minister Steve Webb, in which he said he wants a flat rate of 30 per cent tax relief on pensions for all, “no matter what salary they are earning”.

Currently anyone who puts money into a pension gets tax relief at their marginal rate, meaning those on the higher rate tax bands would have received relief at 40 per cent or 45 per cent.

This means that every £1 put in a pension scheme costs a basic 20p-rate taxpayer 80p and the same pound costs higher 40p-rate taxpayers 60p, and for 45p-taxpayers it costs just 55p. This reflect a higher tax charge paid on the money in the first place, however.

A report by the think tank Pensions Policy Institute found that this tax relief costs the economy upwards of £35bn a year, according to the Mail.

Mr Robbins said the issue with a flat rate is that the government would “probably want to require” 40 per cent taxpayers to pay a 10 per cent benefit-in-kind tax on money that their employers contribute to pensions for them.

Unless it did this, 40 per cent taxpayers would be able to get 40 per cent relief indirectly, by giving up salary in return for higher employer pension contributions on which they would not have to pay tax, Mr Robbins said.

He flagged up that even today more contributions are paid by employers than by individuals and most of the ‘cost’ of tax relief relates to not taxing individuals on money that their employers contribute for them.

HM Revenue and Customs’ data published at the end of February revealed that the proportion of payments contributed by employers has risen consistently since 1990/91 from around 9 per cent in the early 1990’s to 51 percent in 2012-13.

By 2012/2013 contributions from employers and employees were 51 and 41 percent respectively, with minimum contributions accounting for the remaining 8 per cent.

Mr Robbins said: “So restricting the reforms to employee contributions – without also topping up employer contributions for basic rate taxpayers and taxing them for higher rate taxpayers – would have a more muted impact than Steve Webb probably wants.”