Lawyers: Removing pension tax relief will hit savers twice

Tim Wallace
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LAWYERS and pension funds yesterday hit out at proposals to remove tax relief from high-earners’ pension contributions, arguing it would be unfair and overly complicated.

Removing the relief on employee contributions for those earning over £150,000 a year could be a tempting move for the government, raising around £8bn per year for the Treasury.

However, that would mean taxing pension contributions as they are saved, and then taxing the income as it is paid out in later years.

“If this change is made, it would be equitable to remove tax on money being paid out of pensions,” said David Heaton from Baker Tilly.

“However, I can’t see them doing that as the aim is to raise money.”

Firms could avoid the new tax by increasing employers’ contributions, which Heaton believes may prompt the government to cancel national insurance relief on contributions – potentially raising £13bn per year.

“But that would hit more people than just top earners,” he warned.

The pensions industry is also wary of any new taxes on contributions.

“The pensions regime has been subject to massive upheaval in recent years, and more changes would further hit incentives to save and place a huge administration burden on funds,” said Paul Platt from the National Association of Pension Funds.

The annual cap on tax-free contributions has already been lowered from over £200,000 to £50,000, and the NAPF believes the government may “compromise” by reducing that to £40,000, raising an extra £600m per year.