Treasury savings from flat rate pension tax relief revealed

Treasury savings from flat rate pension tax relief revealed

A single flat rate of pensions tax relief set at 20 per cent would save the government £13bn a year according to the Pensions Policy Institute Election Briefing.  

Just twenty four hours before the UK heads to the polls tomorrow in the general election, the think tank has produced a paper dealing with the political hot potato of pension tax relief.

The current system of giving tax relief at people's marginal income rate costs £35bn, according to its figures, but the PPI estimate a single rate at 20 per cent would cost £22bn while a flat rate set at 30 per cent would be cost neutral.

Article continues after advert

The Liberal Democrats have stated that they would consider introducing a single rate of tax relief for pensioners set higher than the current 20 per cent basic rate relief.

The other major parties having made no specific pledges regarding tax relief.

But it is considered by many to be low hanging fruit for the Treasury and likely to be eyed at jealously by any incoming government after tomorrow’s election.

Commenting on the PPI report, Dhawal Chandan, chartered financial planner and director of Glasgow based Just Financial Group, said: “Higher rate tax relief is one of the biggest attractions of pensions for his clients. The restrictions on the lifetime allowance set at £1m are already onerous enough.” 

Tom Selby, senior policy adviser at A J Bell, said: "There is every chance given the pressures on the NHS and the social care system that pension tax relief will come under threat once again from the next government.

"However, we must remember that chronic undersaving for old age has been a huge problem for this country, and one which auto-enrolment is only beginning to tackle. Hacking back pension savings incentives for middle Britain would risk undermining those vital reforms.

"We would, however, support a more fundamental review of the UK's pension tax landscape, which has become hideously complex after a period of incessant tinkering.

"An independent pension tax commission should be established to take a measured view on how the tax system can encourage more people to save for retirement and propose what, if any, changes are needed. This could then form the basis of a cross party consensus and potentially end the constant chopping and changing we have experienced in recent years."

Patrick Connolly, communications manager at Chase de Vere, added: “For many years there have been rumours and stories suggesting radical changes to pension tax relief are imminent. It may happen at some point, although in the meantime we can only give advice on what we know today and the tax relief system as it stands today.”