Pressure is mounting for the next pensions minister to scrap top-up tax relief on money paid into retirement savings.
Pension contribution relief is the carrot dangled in front of savers to encourage them to save into a pension.
However, a Treasury official has hinted privately to the media that keeping the relief in place has ‘no chance’.
For retirement savers, the relief is worth thousands of pounds over the life of a pension.
For basic rate taxpayers, every £80 paid into a pension is worth £100 of retirement savings.
However, a higher rate taxpayer, paying income tax at the 40% rate, only has to contribute £60 to gain the top up to £100. Additional rate taxpayers, paying income tax at 45%, only have to contribute £55 for a £100 top up.
Flat rate tax relief
The Lib-Dems and Labour both view the current relief as ‘skewed’ and ‘unfair’ to basic rate taxpayers.
Both argue the £54 billion a year paid by the Treasury as pension contribution relief benefits better-off retirement savers paying income tax at the highest rates.
The Lib-Dems are suggesting a 30% flat rate that would boost relief for basic rate taxpayers, but cut the amount available for the wealthy.
This would sway the balance of the relief.
All taxpayers would have to pay in £70 to gain the top up to £100, seeing basic rate taxpayers paying in less to gain more, while higher rate taxpayers would lose some of their relief.
A study from The Pensions Policy Institute, a think tank, reckoned basic rate taxpayers paid in around 50% of all pension contributions, but only gained from a quarter of the tax relief.
Damage limitation
The Conservatives have said little about the tax break.
However, whoever is the next Chancellor after the May 2015 elections will find the temptation to snatch a few billion from the £54 billion paid out to retirement savers as difficult to resist.
The move would prove unpopular, but the Westminster view is the damage would not be too bad in terms of votes.
Most high earners who pick up the most tax relief on their pension contributions have already banked the money as they are likely to be well into their 50s and the average voter will have pocketed a gain.
The conclusion must be Britain has not yet seen the end of pension tinkering, whoever wins next year’s election.
