Pension savers could see tax relief on their retirement saving contributions slashed if Chancellor George Osborne follows advice from a think-tank in his forthcoming Autumn Budget Statement.
Reform has published a report slamming tax relief on pension contributions an expensive failure.
The group claims the relief is not fit for purpose and falls short of meeting policy objectives.
Pension contribution relief was introduced as an incentive for investing for retirement.
Savers pick up relief at the highest rate they pay tax, so HM Revenue & Customs adds 20% to contributions by basic rate taxpayers and 40% or 45% for higher rate and top rate taxpayers.
The relief means for every £80 paid into a pension by a basic rate taxpayer, HMRC tops up the payment to £100.
Debt and austerity
The same applies to higher and top rate taxpayers, who apply for the additional 20% or 25% relief via their self-assessment tax returns.
However, the report by Reform, called Mind the (Fiscal) Gap, argues the relief is not working and the current level of government debt and austerity measures mean retirement savers might have to give up such tax incentives to help the economy.
“Pension relief is regressive and offers more to wealthy taxpayers than those who need the help the most,” said the report.
“In fact, pension relief does not really help savings because the lure of tax relief moves money away from other forms of saving.
“Not only that, pension tax relief is complex, affected by other means-tested benefits and is subject to frequent government tinkering.”
The report did point out that one drawback of cutting pension contribution relief could be double taxation on pensions – with income taxed on investing and taxed again on payments as pension benefit after retirement.
Warning to Chancellor
Looking at other tax matters, the report also urges the Chancellor to beware of two other issues:
- Scrapping exemption for workers aged over 65 paying national insurance contributions would raise £735 for the public purse and would only hit the wealthiest 6.3% of earners in the age group
- Increasing the personal income tax allowance to £12,500 a year would cost the government almost £16 billion a year in lost tax, but only 1.3% would go back to the lowest earners
Andrew Haldenby, director of Reform, said: “Any improvement in economic growth will encourage politicians to buy popularity with tax giveaways; instead they should educate everyone that the money has to come from somewhere and comes at a cost.”
The Autumn Budget Statement is scheduled for Wednesday, December 5, 2013.