Pension tax relief is safe for now as Chancellor George Osborne has reportedly decided to leave the current rules in place.
Speculation was rife following a Treasury leak that Osborne had Budget plans to slash tax relief for higher rate taxpayers on the money they save in pensions.
After nearly two weeks of concerted lobbying by the pensions industry and Tory MPs, he has decided to keep his hands off pensions in Budget 2016 on March 16.
“The Chancellor has decided now is not the time to make any more changes to pensions,” said an unnamed source close to the Chancellor quoted in The Financial Times.
“He feels there is too much uncertainty in the markets and the government has not had enough time to properly consider other pension measures brought in over recent years.”
How pension tax relief works
The decision comes as a huge relief to pension savers.
Some providers report higher and additional rate taxpayers had ploughed billions of pounds into pensions in recent weeks in the hope of boosting their funds and beating any Budget crackdown.
The current pension rules top-up pension contributions according to the rate of income tax paid by retirement savers.
This allows earners paying higher rates of tax to gain a bigger boost to their savings:
- A basic rate taxpayer (20%) has to pay £80 into a pension to gain a top-up to £100
- A higher rate taxpayer (40%) has to pay £60 to gain £40 tax relief to make £100
- An additional rate taxpayer (45%) pays £55 topped up by £45 to make £100
Chancellor’s pussyfooting cost £1.5 billion
The Chancellor favoured a flat rate tax relief of between 25% and 33% regardless of the marginal rate of tax paid by the retirement savers.
This would have boosted the savings of basic rate tax payers by lifting the amount of tax relief the received, but would have reduced the amount higher and additional rate taxpayers had as a tax top-up.
A spokesman for SiPP provider AJ Bell claims the Chancellor’s handling of the potential tax change for retirement savers cost the Treasury an extra £1.5 billion in tax relief.
“People who had savings predictably dumped the cash into pensions to boost their funds because they thought the opportunity was about to disappear,” he said.
