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Osborne plans Budget blow to high earners' pension tax relief

Chancellor George Osborne will announce plans to implement a flat rate of pension tax relief in this year's Budget, according to the Financial Times.

 
Osborne plans Budget blow to high earners' pension tax relief

Chancellor George Osborne will announce plans to implement a flat rate of pension tax relief in this year's Budget, according to the Financial Times.

Osborne plans to scrap the current system which gives people tax relief on contributions according to their marginal rate of income tax, which means those paying higher rates of tax receive more relief, and instead provide tax relief to everyone at the same flat rate, according to the paper. It said this rate could be set at between 25% and 33%.

An announcement of changes to pensions tax relief is expected to be made in this year's Budget in March, though, according to the paper, changes would not come into force for another 12 months.

The government launched a review of pensions tax relief in its July 2015 Summer Budget, asking for views on how the system could be reformed. For example, the chancellor mentioned in his Budget speech that pensions, which give tax relief on contributions and growth but not withdrawals, could be taxed like ISAs, with contributions being taxed but growth and income tax free.

But the move to an ISA-style system was met with widespread opposition from the pensions industry, which pointed to the complications involved, leaving a cut to higher rate relief the most likely option.

Hargreaves Lansdown last year declared 'the game is up' for those reliefs, and savers appeared to recognise the danger, with pension contributions from 40% and 45% income tax payers spiking last year.

Many pension experts had expected the government to announce the overhaul in last year's Autumn Statement. But while the government left pensions taxation unchanged in that statement, it now appears to have been merely a stay of execution for higher rate relief.

Higher rate tax relief is estimated to cost the government around £7 billion a year. In total pension tax relief costs the Treasury £35 billion a year. It is thought an ISA-style system would raise £19 billion and a flat rate of 25% would raise about £6 billion.

16 comments so far. Why not have your say?

Malcolm

Jan 18, 2016 at 17:20

But it is NOT tax relief.

It is tax deferral.

Many of those who have become successful later in their career have deferred only basic rate tax for a significant part of their pension savings.

In these cases, tax saving will be negative for higher-rate taxpayers in retirement.

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Mark22

Jan 18, 2016 at 17:51

Another change to the tax/pension system. How is anybody supposed to plan for 20-40 years downstream when the rules change at the whim of somebody who won't be affected.

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Ladysaver

Jan 18, 2016 at 17:53

This worries me too, because pension contributions are indeed simply tax deferral. The whole point of tax relief on pension contributions is that by putting some of your earned income into a pension, you are not receiving that earned income, and will have no benefit from it until you draw a pension. So the Government agreed long ago that as you have not received that part of your earned income, you should not be taxed on it. When you eventually do draw a pension, and thus get some benefit from those earnings, you are taxed on them, because all pension income is taxable.

A flat rate of tax relief on pension contributions might make sense if we had a flat rate of income tax. But we don't, so it is illogical.

I believe this will discourage pension saving.

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William Dickson

Jan 18, 2016 at 19:08

Seems to me a good number of people will be in a lower tax bracket once they reach retirement.A person would need to have an income of over £60000 before paying the higher rate (factoring 25% tax free amount).

Perhaps higher rate tax payers should do just that,pay higher tax.

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Ladysaver

Jan 18, 2016 at 19:19

To William Dickson:

Higher rate tax payers WILL pay higher rate tax on their pension income - and they always have. This is NOT about any form of tax relief on pension income.

Your comment does not address the key issue of tax relief earlier in life, when part of an individual's income is given up when makng CONTRIBUTIONS to a pension.

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Michael Stevens

Jan 18, 2016 at 20:43

Simple Tax Relief for all at 20% and even non tax payers as it is now.

No carry forward of unused relief. Use it or loose it like ISA.

Maximum contribution of £40,000 for all.

Just keep it simple

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William Dickson

Jan 18, 2016 at 20:49

It seems to me a flat rate system is fairer than the current marginal for the reason I mentioned above.Just a comment,not trying to address anything.

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thinblackduke

Jan 18, 2016 at 21:17

I'm getting 40% tax relief now but there is no way I'm going to have the income of a high rate tax payer when I retire! I'm squirrelling away everything I can, while I benefit from 40%. If the relief rate drops to 20%, I will probably use an ISA instead. If it's 25%, the extra 5% may not be worth having, if I'm risking future government tampering.

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Gareth Harries

Jan 19, 2016 at 00:11

Every party has attacked the principle of Tax deferral, whether it be mortgages, pensions or the refund on the tax on dividends to pensions.

None of them work on principles, once it looks like it is costing too much money, they see an easy target, that the majority of the electorate will not realise the principles, to attack.

So hey-ho here we go again.

Fortunately this is one of those areas, I have benefited from over the years, unlike some of the other areas that have come in over recent years, like child tax credit and other associated measures.

It would be interesting to do a balancing equation of the different measures that governments have brought in over the years and how these have (dis)benefited people and whether on balance there is a balancing effect, probably not intentional!

But how you calculate that I have no idea!

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Roy Harding

Jan 19, 2016 at 02:11

Discounting the present 25% tax free lump sum for a moment a flat tax relief rate of 25% would be unfair to higher rate taxpayers.

An additional rate taxpayer paying 45% would effectively be being taxed at 20% on contributions then 45% on income when retired making an overall 65% tax rate.

A flat contribution tax rate relief should be matched with an equal maximum tax rate on income paid in retirement. I don't suppose it will be.

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TERRY BURNETT

Jan 19, 2016 at 09:29

If the Tax relief on pensions becomes 25% on contributions, will the Tax on Pensions when drawn become 25%.

If so is this not just another Tax grab for those people who have paid 20% Tax?

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Hampshire cynic.

Jan 19, 2016 at 09:36

I agree with Michael Stevens. Keep it simple. Perhaps a universal 25% would be even better.

The one thing George should do is to give NHS doctors a lifetime allowance of £1.25M or even £1.5M, but only in respect of their salaried NHS contracts. Otherwise, such doctors will only retire early and then get employment though an agency or as locums with the same NHS. I should make clear that I am not a medic!

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Hampshire cynic.

Jan 19, 2016 at 09:42

I take Terry Burnett's point regarding a potential tax grab if 25% relief was to be introduced, but we need to bear in mind if Corybin and Macdonald get in we will all be paying a much higher tax rate unless one is, long term unemployed, a Unite member or a scrounger.

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P L

Jan 19, 2016 at 11:07

Re: the comment about NHS doctors. I think you will find the flood gates are already wide open. A colleague of my wife recently discovered he was already over the LTA allowance (having worked beyond 60) - immediately retired. Lots of GP's are also going as soon as they can. One Hospital I believe hasn't actually got any NHS salaried consultants in one speciality, they've all up'd and gone.

The NHS pension has an unusual benefit in that you can retire for 24 hours and then go back to work in the same job. Most private employers don't allow that to happen. If you end up paying the same consultant a salary and/or contract rates as well as a pension it doesn't seem to be a good way to save much.

Keep them working with the prospect of a generous pension and then hope they die quickly ;-)

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johnbe

Jan 23, 2016 at 13:50

Please remember that George Osborne should really be known as the Grand Pension Thief.

Since coming to office as Chancellor, he has continually meddled with pensions reducing the Lifetime allowance from £1.8million to £1m. ,annual contribution allowance from £250k to £40k (£10k for 45% taxpayers). His so-called pension reforms allowing the over 55s to withdraw money from money -purchase pensions as income, which is then possibly taxed at a higher rate than that person would normally pay (as it puts them in the higher rate tax bracket).

This is all about stealing peoples' pension savings to pretend to reduce the massive deficit.

If Osborne was serious about doing this he should start by cutting the £12 billion, soon to be £16 billion annual spend on Overseas Aid rather than on the backs of the hard working British savers who he claims to represent.

Pensions are an easy target for him to pluck and he should keep his grabbing hands off our prospective pensions, otherwise if people have to rely on the state further down the line, where will the money come from?

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geoffrey mulford

Jan 23, 2016 at 20:50

I have been a Labour supporter most of my life. However I think what Osborne has done to pensions has been great. Low rate tax payers have been shafted under the present system. All we can ask for is a fair system. I find it hard to believe that the anybody thought the present system was fair.

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