Pension tax relief for those on higher incomes looks set to be ditched as part of HM Treasury’s overhaul of the pensions system.
Chancellor George Osborne is expected to announce a move towards a ‘flat-rate’ government contribution in his March Budget, the Financial Times has revealed.
Currently workers enjoy pension tax relief at the same rate as their income tax, but the change would see a shift towards a pension savings incentive of between 25 and 33 per cent for everyone, people close to the Treasury have said.
According to the FT article, the changes are unlikely to come into force for at least a year in order to give the industry time to prepare for the reform.
Depending on where the flat rate is set, the changes could save the Treasury billions of pounds a year.
A review into pensions tax relief was launched last summer, which found that retirement tax relief cost nearly “£50bn” a year. This consultation is now closed.
A HM Treasury spokesman said: “We have not decided on whether or how to reform the system and are considering all options, including retaining the current system.
“We are considering the responses and will respond at the Budget.”
Keith Churchouse, chartered financial planner at Guildford-based Chapters Financial, said in the shorter term this would be very bad news for higher earners, but if they do introduce a flat rate then it could be a “very good thing for pensions”.
“If they are bending it around at 25 or 30 per cent as the flat rate tax relief, then we may well find that the squeezed middle may change their financial planning to increase their pension contribution going forward.
“We might see more funds flowing into pensions in the longer term, and that has to be a good thing for the vast majority of people in the UK.”
Mr Churchouse said he would be very surprised if Mr Osborne does not announce changes to pension tax incentives in the Budget.
He added: “I think we will get a scramble of higher rate taxpayers in the next few months to make sure they do top up their pension while higher rate tax relief is available.”