Labour and Conservatives would "significantly complicate" the pension contributions system, says IFS

Guy Bentley
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Labour and Tories complicate the pension tax (Source: Getty)

Both Labour and Conservative plans to change reform the system of pension contributions have come in for sharp criticism from the Institute for Fiscal Studies (IFS).

The independent think tank says the system has been rattled by instability over the last five years, which would continue whichever of the top two parties formed the next government.

Labour want to cut the rate of income tax relief for high earners from 45 per cent to 20 per cent. The policy would affect those whose income including pension contributions is over £130,000 and those whose income including employee and employer contributions is more than £150,000.

An Ed Miliband government would also cut the maximum amount that can be saved tax-free for a pension to £30,000. The problem with the proposals, according to the IFS, is that it further complicates the system.

Phasing out the higher rate relief under Labour's plans would create a "cliff edge" leaving some people significantly worse off if they got a pay rise and critically, in the IFS's view:

It is hard to see why it should be ‘unfair’for those above £150,000 to get tax relief at their marginal rate but not ‘unfair’ for higher rate
taxpayers to do so.

The IFS were hardly more impressed with the Conservatives' plans. The Tories want to cut the annual allowance for those earning more than £150,000 from £40,000 to £10,000. "Why someone earning £150,000 should be able to save £40,000 in a pension while someone earning £210,000 should be able to save just £10,000 is unclear," said the IFS.

The policy would have a similar effect as punitively high marginal tax rates with high earners saving for a pension discouraged from trying to boost their incomes similar punitively high marginal tax rates.

At the end of their analysis, the IFS was close to despair at the plans of the two major parties:

Stability and predictability are important in most parts of the tax system, but none more so than the taxation of pension savings. The frequency and direction of reforms to pension taxation under this government has been concerning. The continued desire to dismantle an important and relatively sensible part of the tax system is more worrying still.

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