Pensions savers could soon see a single rate of tax relief if industry proposals come into force.
Last night, the government closed its consultation on how pensions should be taxed, after providers were invited to put forward their concerns. Pensions experts have called for a single level of tax to replace the current, tiered system.
At the moment, for every £1 paid into a pension scheme, savers receive a government contribution on top. The rate is equivalent to each saver’s income tax band. If the industry lobby is successful, this will be replaced by a single, flat rate of tax relief – which some believe the government is likely to put at 20-25 per cent.
The change would benefit lower rate taxpayers – if set above 20 per cent – who would get an extra top-up from the government. But higher rate payers would lose some of their 40 per cent relief.
“The current system is regarded as unfair largely because higher-rate taxpayers get more money back, but most go onto being lower rate taxpayers in retirement,” said Richard Parkins at Fidelity, adding savers would need a £600,000 pot to stay higher-rate payers in later life.
The government is hoping to encourage saving among low and middle earners, while also cutting its own bill for tax relief. “Every change in the tax system has winners and losers and this would be a net gain for the government and negative for higher rate payers,” said Patrick O’Sullivan of Redington.
The results of the consultation are expected to be announced in the March 2016 Budget.