Former Chancellor George Osborne kept a tight lid on the economy during his time in office – but since he has left some of his secrets are being revealed.
The latest is the true cost to the Treasury of scrapping pension contribution relief for higher and additional rate taxpayers.
Osborne tweaked a lot of pension rules such as reducing the lifetime allowance to from £1.8 million to £1 million.
He also tinkered with the annual contribution limits for high earners – reducing the maximum anyone can put into a pension to £40,000 a year including tax relief.
For anyone earning a six-figure income, the annual allowance decreases on a sliding scale to allow pension contributions of just £10,000 a year.
Policy won’t work
The objective was to reduce the amount of tax relief paid out by the Treasury.
But spending and tax watchdog The Office of Budget Responsibility (OBR) thinks the policy will not work and will starve the government of £5 billion in tax revenues each year.
The OBR claims high earners will shun pensions as a result of the changes and shift their cash into tax incentivised investments such as Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
These schemes have annual limits but allow investors to offset their stakes in start-up or growing companies against income tax while growing free of capital gains tax.
Tax loss will increase
Osborne also raised investment limits on ISAs that has seen cash held in the accounts mushroom to £516 billion.
“In recent years, the government has made a number of significant changes to the tax treatment of private pensions and savings and introduced a variety of government top-ups on specific savings products,” says the OBR report.
“In doing so, it has generally shifted incentives in a way that makes pensions saving less attractive – particularly for higher earners – and non-pension savings more attractive – often in ways that can most readily be taken up by the same higher earners.”
The OBR also warned that as interest rates, the amount of ‘lost’ tax will increase and voiced concerns that tax incentives make saving a better investment than buy to let housing.
