Govt ‘pours cold water’ on pension tax reform

Yesterday’s Call for Evidence on pension tax relief administration from the Treasury reiterates the Government’s position on pension tax relief and “appears to pour cold water” on recent calls for fundamental reform, according to AJ Bell.

The Treasury’s Call for Evidence stated that the Government had considered the possibility of reforming pensions tax relief in 2015, but that responses to this consultation provided “no consensus for change”.

In the 2016 Budget, the Government announced that it would not be making fundamental reform to the pensions tax relief system, and therefore yesterday’s Call for Evidence indicated it does not cover the marginal rate relief structure of pensions tax relief, nor does it cover issues around the limits on pensions tax relief.

AJ Bell chief executive, Andy Bell, described speculation about radical pension tax relief reform following the impact of coronavirus on public finances as “inevitable.”

“Whilst calls for a flat rate of pension tax relief are optically simple, most of the proposals completely ignore defined benefit pensions and the complications implementing a flat rate of tax relief would cause in trying to ensure fairness in treatment between defined benefit and defined contribution schemes,” he said.

“It is difficult to see how a flat rate pension tax relief system could be introduced without calling an end to defined benefit pension accrual in the UK and it is welcome the Treasury has moved to quell such rumours by explicitly excluding fundamental tax relief changes from the scope of this call for evidence.

“If there is to be reform to retirement savings incentives in the future, this needs to be done in a measured way with a clear focus on simplifying the rules and encouraging more people to save for retirement.”

The Low Incomes Tax Reform Group (LITRG) announced that it welcomed the publication of the Call for Evidence.

The group described it as a chance to “end the injustice” that means around 1.75 million people on low incomes are being charged 25% more for their pension contributions, due to the way their employers’ pensions schemes operate.

Head of the LITRG Victoria Todd, said: “We appreciate that the coronavirus pandemic has caused significant upheaval within government, so it is extremely welcome that the Treasury has now published the Call for Evidence on pensions tax relief administration promised in the Conservative Party’s 2019 manifesto.

“However, we note with some concern that one of the possible solutions put forward is to remove tax relief for non-taxpayers who receive it by virtue of relief at source schemes. Any solution should ensure a levelling up rather than down so that existing tax relief is extended to those missing out rather than taken away from others who benefit from it.

“LITRG’s proposed fix to the problem is that HMRC use data they already have, collected via the PAYE ‘real-time information’ system, to identify those taxpayers affected and make a payment to them equivalent to the tax relief they would have received in a relief at source scheme. We look forward to engaging with the Call for Evidence to make the case for this.

“It is time for the Government to move forward and end this injustice that affects so many people on low incomes.”

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