Higher rate taxpayers would lose out on £44,000 in pension tax relief if a flat rate of 30 per cent is introduced, according to analysis from LEBC.
The national firm estimated the loss would be even bigger for top rate taxpayers, which would see their savings reduced by £66,000.
On the other hand, lower earners would get a boost of almost £44,000 in their pension savings, if the government accepts the Treasury select committee suggestion, the firm said.
The MPs argued last week (26 July) in their report entitled Household finances: income, saving and debt the main financial incentive the government provides for long-term saving, was not an effective or well-targeted way of incentivising saving into pensions.
Currently tax relief is given on savings as they enter the pension pot and at the saver's marginal tax rate, while savings are taxed as people withdraw them for their retirement.
But the committee said this should be fundamentally reformed and the government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.
| Current tax relief £10,000 pa gross paid in | Adjusted net contribution paid in following proposed change in relief | Fund now after 30 years and mid growth rate £ | Fund after 30 years if contributions increased /reduced by tax relief change |
Basic rate taxpayer 20% ( income up to £46,349) | £2,000 net cost £8,000 | £3,000 net cost £7,000 | £308,000 | £351,982 |
Higher rate taxpayer 40%(income over £46,349) | £4,000 net cost £6,000 | £3,000 net cost £7,000 | £308,000 | £263,986 |
Top rate taxpayer 45%(income over £150,00) | £4,500 net cost £5,500 | £3,000 net cost £7,000 | £308,000 | £241,995 |
Tax relief given at source on individual and employer contributions. Invested for 30 years in a fund achieving a mid-growth rate, contributions are assumed to be non-increasing and adjusted by the tax payer to cost the same as under the current system, so the taxpayer would pay the same net amount as now. Quotes obtained from the lowest cost platform and adjusted for inflation of 2.4 per cent over 30 years so that fund values are real terms figures. (Source: LEBC)
But Kay Ingram, director of public policy at LEBC, does not agree with the Treasury committee's conclusion that tax relief isn’t a good incentive.
She said: "Reducing the top rate won’t increase savings; it will create a cash flow problem for higher and top rate taxpayers."
Ms Ingram said, however, there was a lot of good analysis and some good recommendations in the MPs' report, such as the need to simplify pension savings tax by scrapping the lifetime allowance.
She said: "It is illogical to have both an annual allowance and a cap on the total pot size.
"We would wish to see this simplified by having one annual allowance for all earners, getting rid of the tapered allowance and putting the money purchase annual allowance back to £10,000 per year, not just £4,000, which is a stealth tax on those who access pension freedoms, without the benefit of advice."
The money purchase annual allowance is the amount a person, who has already begun drawing from their pension, can pay in one year back into their retirement savings without a tax charge applying.
maria.espadinha@ft.com
