Ending Higher Rate Relief on Pension Savings Not as Obvious as it Seems

Abstract

The first Budget after an election often contains controversial revenue-raising measures and many commentators expect tax relief on pension contributions to be considered as a revenue source after the 2015 election. Meanwhile, the idea of a flat-rate of tax relief on pension contributions (rebadged as a matching contribution from the Government) has attracted some support from across the political spectrum. This would give everyone the same rate of upfront tax relief on pension contributions, instead of giving relief at the individual’s marginal rate (currently 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers). This paper begins by setting out what politicians and their associates have said about reform of pensions tax relief in general and the ‘flat rate relief’ idea in particular. We then discuss the cost and distribution of tax relief, the practical difficulties with flat-rate matching contributions, and some of the other reforms that are sometimes proposed. We hope our analysis may contribute to a more informed debate on pensions tax relief – and that the next Government will tread carefully before rushing into any reform.