Chancellor of the Exchequer Sajid Javid is considering cutting pensions tax relief for high earners in his upcoming March Budget.
As reported in the Financial Times this weekend, Mr Javid is considering reforms to make the system fairer for those on lower incomes, including cutting high earner's relief to 20 per cent.
Under current rules tax relief is paid on savers' pension contributions at the highest rate of income tax they pay.
This system costs the Treasury almost £40bn a year in lost income tax revenue but cutting tax relief on pension contributions to 20 per cent, rather than the 40 per cent enjoyed by higher earners, could help raise £10bn a year.
Tom Selby, senior analyst at AJ Bell, said: “Barely a Budget goes by that the Treasury isn’t rumoured to be eyeing radical pension tax relief reform. This constant speculation risks altering investor behaviour and damaging confidence in the stability of the system.
“Ironically, in the short-term such stories will inevitably cost the Exchequer cash as savers pile into pensions to make the most of tax relief while it is still there.”
Mr Selby warned any reforms to tax relief must not discourage savers from saving into a pension and other changes to the pension system may be better suited.
Mr Selby said: “We believe the focus at the moment should be improving the existing system rather than burning the whole edifice to the ground.
“The annual allowance, for example, has become ridiculously complex, with three different versions for people to navigate. Moving to a single annual allowance for defined contribution savings would represent a significant positive step in simplifying pensions.
“There should then be an evaluation of whether the annual allowance is an appropriate mechanism for controlling defined benefit pension costs given the problems it has caused NHS workers in particular.
“One option worth considering, and flagged previously by the Office of Tax Simplification, would be to control DC pensions with a single annual allowance and DB with a lifetime allowance. This would radically simplify the rules and remove the unfair punishment against strong investment performance caused by the lifetime allowance in DC pensions.”
Last week (February 7) Hargreaves Lansdown published a paper in which it urged the government to announce a review of the UK’s pension tax rules.
The firm is in favour of scrapping pension tax relief entirely and to replace it with a pension top up system, either through the government or the employer.
Under the provider’s proposals all employee contributions would be doubled irrespective of their tax bracket.
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