Flat rate tax relief on pensions

Successive governments have seen changes to the tax treatment of pensions as a means of increasing revenues. Nigel Lawson introduced a tax on pension fund surpluses, Gordon Brown abolished Advance Corporation Tax and George Osborne has reduced the lifetime and annual allowances by 44 and 84 per cent respectively.

Now the chancellor is strongly rumoured to be considering making changes to the current system of tax relief on pension contributions. One option under consideration is a single flat rate of tax relief, most commonly rumoured to be 30 per cent.

Switching to a flat rate of relief would further exacerbate the unfairness of a progressive tax system that sees those on volatile incomes taxed more heavily than those on steady incomes. The biggest losers would most likely be the 4 million self-employed who are older and closer to retirement than employees.

Significant reductions to the lifetime allowance and the tapering away of the annual allowance for higher earners have already punished prudent savers and created an uncertain pensions landscape. A flat rate of tax relief on contributions would add further incoherence to what is already a chaotic system and punish those on volatile incomes. Relief should continue to be provided at marginal rates.

Read the full briefing here

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