IFS calls for end to 'ludicrous’ pension taxes

IFS calls for end to 'ludicrous’ pension taxes

The Institute for Fiscal Studies has called on the government to put a stop to the "ludicrously generous" tax treatment of inherited pensions rather than tinkering with pensions tax relief in next month's Budget.

The independent economic research organisation said although cutting pensions tax relief for high earners would bring in more than £11bn, it would go against one of Boris Johnson’s election pledges.

The think tank said a "better" option to improve the taxation of pensions would be to reduce the tax-free lump sum which is currently set at 25 per cent, impose national insurance contributions on employer contributions to pensions and end the tax treatment of inherited pensions.

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Under current rules pensions are not counted as someone's estate for inheritance tax purposes. The current IHT threshold is £325,000 per person and anything over this limit is subject to a 40 per cent tax bill.

Paul Johnson, director of the IFS, said: "Rishi Sunak’s first Budget could be the most important fiscal event in years. It will set the direction of policy for the next five years. If this new government is going to make radical change to taxes and spending this surely is the time to do it.

"There are plenty of tax rises which would both raise revenue from better off individuals and improve the coherence of the tax system."

Before Sajid Javid suddenly resigned from his role as chancellor this month, he was considering cutting pensions tax relief for high earners in his Budget on March 11, in a bid to make the the system fairer for those on lower incomes.

The issue of pensions taxation is still expected to be addressed when Mr Javid's replacement, Rishi Sunak, will present the Budget next month, just 27 days after taking office.

Under current rules tax relief is paid on savers' pension contributions at the rate of income tax they pay.

But the government is toying with the idea of cutting tax relief to 20 per cent across all income bands, rather than having the 40 per cent enjoyed by higher earners.

According to the IFS this would increase the income tax bills of those earning over £50,000 a year, for whom Boris Johnson pledged income tax cuts before becoming prime minister. 

Mr Johnson also said abolishing entrepreneurs' relief in capital gains tax and increasing council tax bills faced by those in more expensive properties would be "desirable" to make the tax system "more equitable and more efficient".

There have also been calls for the chancellor to scrap the complex residence nil rate band and replace it with an equivalent increase in the nil rate band, when looking at reforms to IHT.

This is because the RNRB has created a number of anomalies that mean it is not available to everyone and only added further complexity to an already complex system.

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