The Treasury has allayed fears of a major shake-up of pension tax breaks that could penalise retirement savers.
It rejected a recent call by MPs to look at overhauling the long-running principle of saving into a pension from untaxed earnings, saying there was ‘no consensus for either incremental or more radical reform’.
Any changes could have ‘significant impacts’ for pension schemes, employers and individuals, it added,
Treasury rebuff: MPs told there is ‘no consensus’ for a shake-up of pension tax breaks
The rebuff means the Chancellor is virtually certain to look elsewhere for big cash raising measures to fund the NHS and other projects in the Budget on 29 October.
However, it does not entirely rule out more tinkering to annual and lifetime allowances, which currently stand at £40,000 and £1.03million respectively.
The spectre of a raid on pensions tax relief, which at present allows everyone to save for retirement out of untaxed income, has haunted savers for years.
In 2015, the Government is believed to have seriously considered moving to a ‘flat rate’ system where all savers get exactly the same rebate.
This could have seen the introduction of a new ‘Pensions Isa’ where everyone saves out of taxed income and less money goes into pots as a result.
One major problem with overhauling pension saving and lowering the tax relief available to higher earners is the salary sacrifice system, whereby savers forego wages and have the money paid straight into their retirement pot.
Some companies use this, but others do not. Unless this was axed, those saving via salary sacrifice would continue to get full tax relief, while workers outside the system would not.
MPs on the Treasury committee called on the Government to take another look last summer, saying: ‘There is widespread acknowledgement that tax relief is not an effective or well-targeted way of incentivising saving into pensions.’
How do pension tax breaks work now?
The Government currently pays out around £38billion a year in tax relief on individual contributions to pension pots. Another estimated £15billion goes to employers in the form of National Insurance exemptions.
The tax perk for individuals is aimed at encouraging us all to save more for retirement, but at present you get a bigger sweetener the more you earn.
The rebate we get is based on our income tax rates of 20 per cent, 40 per cent or 45 per cent, which tilts the system in favour of the better-off.
But it’s supposed to ensure you aren’t penalised by tax on your pension contributions, so if you earn enough to put more in your pot you get more back in tax relief.
It added: ‘In particular, the Government should give serious consideration to replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.’
But today, the committee published the Government’s response, which said the consultation carried out in 2015 showed there was no clear consensus on reforming pensions tax relief in a way that met four key principles – simplicity and transparency, personal responsibility, building on automatic enrolment and sustainability.
‘The Government is also aware that any changes to the pensions tax relief regime could have significant impacts for pension schemes, employers and individuals,’ said the Treasury.
‘While the Government keeps all taxes under review, no consensus for either incremental or more radical reform of pensions tax relief has emerged since the consultation in 2015.’
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