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Pension taxes are 'milch cow' for chancellor, says IFS head Pension taxes are 'milch cow' for chancellor, says IFS head
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George Osborne is using pension taxes as a “milch cow” to pay off the deficit, the head of the Institute of Fiscal Studies has said.George Osborne is using pension taxes as a “milch cow” to pay off the deficit, the head of the Institute of Fiscal Studies has said.
The chancellor is expected to announce the results of a Treasury inquiry into tax on pensions in the budget on 16 March. Among the changes being considered is the replacement of variable tax relief on pension contributions with a single, flat-rate of between 25% and 33%, which would cause high earners to lose some of their rebates.The chancellor is expected to announce the results of a Treasury inquiry into tax on pensions in the budget on 16 March. Among the changes being considered is the replacement of variable tax relief on pension contributions with a single, flat-rate of between 25% and 33%, which would cause high earners to lose some of their rebates.
Paul Johnson, director of the leading independent thinktank the IFS, said: “The tax regime has been changed and changed again as pension savings have proved something of a milch cow for the current chancellor”. Paul Johnson, director of the leading independent thinktank the IFS, said: “The tax regime has been changed and changed again as pension savings have proved something of a milch cow for the current chancellor.
“By reducing the amount that can be put in a pension free of tax in any one year and the maximum size of the accumulated pot, he has increased tax revenues by more than £5bn a year.”“By reducing the amount that can be put in a pension free of tax in any one year and the maximum size of the accumulated pot, he has increased tax revenues by more than £5bn a year.”
Pension experts are already urging those who earn £42,385 or more to make large contributions to their pensions ahead of the budget in March. The Pensions Policy Institute has estimated that a flat rate of 25% tax relief would save the Treasury £6.1bn a year.Pension experts are already urging those who earn £42,385 or more to make large contributions to their pensions ahead of the budget in March. The Pensions Policy Institute has estimated that a flat rate of 25% tax relief would save the Treasury £6.1bn a year.
Johnson said changes to pensions tax relief could cause “the implicit contract at the heart of our pension system [to] buckle under the pressure”.Johnson said changes to pensions tax relief could cause “the implicit contract at the heart of our pension system [to] buckle under the pressure”.
“Governments of all stripes have recognised that widespread access to good private pensions is an essential part of the implicit deal with the voter — we won’t pay you much of a state pension, but we will make sure you have the chance to save for yourself,” wrote Johnson in the Times.“Governments of all stripes have recognised that widespread access to good private pensions is an essential part of the implicit deal with the voter — we won’t pay you much of a state pension, but we will make sure you have the chance to save for yourself,” wrote Johnson in the Times.
“And at the heart of that deal has been the tax treatment of private pensions. It should go without saying that nobody would tie up hundreds of thousands of pounds in a pension, which they can’t access for decades, if there weren’t some benefit for doing so compared to saving in some other way. That benefit is tax relief.”“And at the heart of that deal has been the tax treatment of private pensions. It should go without saying that nobody would tie up hundreds of thousands of pounds in a pension, which they can’t access for decades, if there weren’t some benefit for doing so compared to saving in some other way. That benefit is tax relief.”
The proposals have provoked disquiet among Conservative MPs, with Mark Garnier, who represents Wyre Forest, saying that a move to tax higher rate payers more would be “bad politics, symbolically”.The proposals have provoked disquiet among Conservative MPs, with Mark Garnier, who represents Wyre Forest, saying that a move to tax higher rate payers more would be “bad politics, symbolically”.
“I am not sure the politics of hammering the rich works,” he told the Independent. “The people who will benefit are very unlikely to change the way they vote, while those who lose out will be understandably angry. If you say to 40p taxpayers that they are going to be penalised, there would be a certain amount of unrest.”“I am not sure the politics of hammering the rich works,” he told the Independent. “The people who will benefit are very unlikely to change the way they vote, while those who lose out will be understandably angry. If you say to 40p taxpayers that they are going to be penalised, there would be a certain amount of unrest.”
Former Conservative leadership hopeful David Davis told the Times that such a move would deter people from providing a full state pension for themselves. “It’s problematic because the pension industry used to be the jewel in the economic crown when it comes to having a population looking after themselves.”Former Conservative leadership hopeful David Davis told the Times that such a move would deter people from providing a full state pension for themselves. “It’s problematic because the pension industry used to be the jewel in the economic crown when it comes to having a population looking after themselves.”