The Organisation for Economic Co-operation and Development (OECD) has suggested pensions tax relief in the UK would be fairer if it was changed to a flat rate or completely overhauled.
In the country notes published alongside its 263-page report titled OECD Pensions Outlook 2018, the body stated a single 33 per cent rate of tax relief on contributions or an Isa-style TEE tax regime with a 50 per cent government matching contribution "would achieve a smoother overall tax advantage across income groups than the current EET tax regime".
The UK operates an EET system, where contributions are exempt from tax, investment returns are exempt from tax, but the proceeds of pension savings are taxable.
In a TEE system, the contributions are taxable, but thereafter investment returns are exempt and the proceeds are not taxed in retirement.
The OECD said that under the current net pay arrangement schemes – where members get tax relief by making their contributions before their pay is taxed – there was a "wide gap" in the treatment of savers.
This difference lay between non-taxpayers, who get no tax advantage when saving in private pensions, and those on the additional rate of income tax, who save the equivalent of about 50 per cent of their pre-tax contributions in taxes.
Stephanie Payet, private pensions analyst at OECD, said: "If you implement a single tax relief rate of for example 33 per cent, you will increase the tax advantage for the lower and middle income earners, compared to the current system, and will reduce the tax advantage for the high-income earners.
"A single tax relief allows you to reduce the differences between income groups, without necessarily removing the incentive to save for any individual."
Ms Payet said that TEE with a matching contribution achieved the same objective. Depending on the tax rate, governments can target the matching to certain income groups, she said.
"Therefore you may even have something that declines with income, if that is your policy objective," she added.
A shift to a single rate of pensions tax relief or TEE was considered by the government in 2015 but was later abandoned.
George Osborne, the chancellor at the time, said there had been 'no consensus' on which system might be best.
A recent report from the Royal Society of Arts (RSA) think-tank – led by former Labour adviser Matthew Taylor – concluded that 40 per cent of government spending on pension relief goes to the top 10 per cent of those claiming it, who earn £70,000 a year or more.
The think tank urged the government to introduce a 30 per cent flat rate of tax relief, which "would be progressive, cost-neutral and leave three-quarters of earners better off".
Chancellor of the Exchequer Philip Hammond has previously said he considers tax relief to be "eye-wateringly expensive".
The overall cost of pension tax relief stood at £38.6bn in 2016 to 2017, according to data from HM Revenue & Customs (HMRC).
maria.espadinha@ft.com
