Chancellor George Osborne has missed a trick by backing down on pension contribution tax reform in his Budget 2016, claim his critics.
Think-tank The Resolution Foundation believes moving the tax relief from a system based on marginal income tax rates to a flat 30% rate could have boosted pension pots for the average earners by up to 14%.
Instead, the tax relief rules remain the same unless Osborne tweaks them in his Budget, which he has said he will not do this year.
The think-tank argues that those earning the most gain the most from the present tax relief rules.
How pension tax relief works
Those earning the lowest pick up a 20% top-up on every £1 they save into a pension.
However, those earning the most and paying income tax at 40% or 45% get double the relief or more.
To save £100 into a pension, a basic rate taxpayer (20%) must contribute £80, while a 40% taxpayer needs to save only £60 and an additional rate taxpayer (45%) even less – £55.
Had the rate changed to the expected 30%, everyone paying in £70 to a pension would have had the contribution topped up to £100.
The foundation felt that the Chancellor could have saved public money and improved the pension prospects for millions of lower paid workers by introducing the flat rate tax relief.
Strong argument for change
“There is a strong case for changing the system for lots of reasons,” said a spokesman for the think-tank.
“The government would have saved a significant amount of money running into billions, while the end result would have been a lot fairer for everyone and those earning the least would have had a chance to have a bigger pension fund and a more financially comfortable retirement.
In a statement earlier in the week, The Treasury confirmed that Osborne would not change pension contribution tax relief in his Budget 2016, scheduled for March 16.
“We have examined all the options and do not feel this is the right time to change pension tax rules as other recent changes have not had time to bed in and because the country’s economic footing is still uncertain.”
