UK pensions: Industry reacts to hints flat rate pensions tax relief could be introduced by government at the March budget

Hayley Kirton
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(FILES) - A photo taken on March 27, 201
Government could be considering a flat rate tax relief for pensions (Source: Getty)

The tax relief available on pensions for higher rate taxpayers could be about to be slashed, as the government looks set to introduce a flat rate relief.

The Financial Times has reported that chancellor George Osborne could announce in the upcoming March Budget that pensions tax relief, which is currently applied at the same rate people pay income tax at, will be the same for everybody, with the rate most likely being set between 25 and 33 per cent.

The Treasury ran a consultation on pensions tax relief between July and September last year. In last November's Autumn Statement, it was announced that the consultation response would be revealed at the March Budget.

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Pensions and benefits consultancy Hymans Robertson is keen for government to maintain an exempt exempt taxed (EET) structure for pensions relief, as opposed to a taxed exempt exempt structure (TEE), stating that a move away from the traditional setup would be unlikely to yield any long-term gain, despite potentially costing the industry up to £3bn.

"A TEE regime would have also been monumentally difficult to implement," added Chris Noon, a partner at Hymans Robertson. "It would have resulted in either the complexity of a two tier system for past and future pension saving, or a transitional ‘tax raid’ on past pensions."

Under a EET system, contributions and investment returns are exempt while withdrawals are taxed. In a TEE system, contributions are taxed while investment returns and withdrawals are exempt.

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However, rather than outright supporting the flat rate, Noon went on to suggest that a cap on relief within the current system would be preferable.

"Of all the options on the table for Government, modifying the current system to bring in a capped rate of tax relief will represent the smallest change for the greatest policy benefit," Noon said.

"It would enable the removal or at least a simplification of the complex system of annual and lifetime limits. It will also target pension tax relief at low and middle earners who are currently under saving for retirement."

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