Ahead of next month's Budget, the TaxPayers' Alliance is today calling on George Osborne to rule out a single rate of tax relief on pension contributions.
The Chancellor is strongly rumoured to be considering imposing a flat rate of tax relief on pension contributions at 30 per cent, but a new TPA briefing paper demonstrates why such a move would be fundamentally misguided and unfair.
Calls for this measure are based on a misunderstanding of how the pension system works. The tax treatment of pension contributions and pension income should be symmetrical so that those whose incomes change can smooth their taxable income. A system which does not allow this will lead to the double taxation of income.
Today's briefing concludes:
- Providing tax relief at marginal rates partially undoes the unfairness of a progressive tax system in which two people with identical lifetime incomes can pay different amounts of tax
- A flat rate would penalise those with volatile incomes the most. These people are most likely to be self-employed and are therefore older and closer to retirement - i.e. with less time to adjust to any changes
- Figures showing the "cost" of tax relief on pension contributions are misleading. So-called "costs" are more indicative of the amount of tax being deferred rather than foregone as pension income is taxed
- The proposal under consideration would result in higher rate taxpayers effectively being fined to make pension contributions
- Implementation would require vast amounts of complex legislation to prevent abuse and be near impossible in defined benefit schemes
Click here to see the full briefing note with a worked example
Jonathan Isaby, Chief Executive of the TaxPayers' Alliance, said:
"The Chancellor should resist calls for a flat rate of tax relief on pension contributions which fly in the face of economic rationale and would make our 21,000 page tax code even more incoherent. The biggest losers from such a change would be prudent savers with fluctuating incomes, particularly the 4.7 million self-employed.
A flat rate of relief would leave many paying to save for modest retirements while those with identical lifetime incomes from a steady source would be handed arbitrary subsidies. Such a move would be fundamentally misguided and unfair and the Chancellor should rule it out in advance of the Budget."
TPA spokesmen are available for live and pre-recorded broadcast interviews via 07795 084 113 (no texts)