Ally supports Hammond on Budget plan to target pensions

A SENIOR Tory has suggested that pension tax breaks could be snatched away because they do not really encourage workers to save.

The controversial intervention by Treasury committee chairman Nicky Morgan, a close ally of Chancellor Philip Hammond, comes just weeks before the Budget.

Savers currently pay no tax on income they put into a pension pot while working. Instead, they pay tax when they take the money out in retirement.

The tax break is offered in a bid to encourage responsible saving by workers. But Mrs Morgan claims this is not an effective way to boost saving.

Her committee argued that savers should be encouraged to think of it as a bonus granted by the Treasury – rather than money which is rightfully theirs. And it suggested that a tax could be levied on pension contributions.

But former pensions minister Sir Steve Webb, of investment manager Royal London, said the plan would be a disaster for savers. He added: ‘It is important that pension tax relief does not simply become the go-to pot of money for broke Chancellors. At a time when millions are not saving enough for their retirement, taking billions out of pension tax relief would be a big step in the wrong direction.’

Experts fear Mr Hammond could use Mrs Morgan’s report as cover to claw back the benefit in the Budget.

Earlier this week it emerged the Chancellor is already considering plans to reduce the tax savings offered to anyone saving for a pension to help

for a pledge to increase health spending by £20billion. The Treasury committee said: ‘The main financial incentive that the Government provides for long-term saving is tax relief on pension contributions. This is not an effective or well-targeted way of incen- tivising saving into pensions. The Government may want to consider fundamental reform.’

At present, the tax saving is worth 20p in every £1 paid into a pension pot by basic rate payers. For higher-rate payers, it equates to 40p in every £1. The committee has suggested doing away with this system and introducing a flat rate of tax relief, possibly at 20 per cent.

Pensioners would then pay income tax again when taking the money out in retirement.

Tom Selby, of savings firm AJ Bell, said: ‘Fundamental reform as some have suggested, such as introducing a flat-rate of tax relief, would hit right into Conservative heartlands and risk causing a rebellion among backbench MPs already riled by the Brexit negotiations.

‘ More importantly, it would risk the fragile savings culture being nurtured in the UK through automatic enrolment. Lack of saving remains arguably the biggest challenge facing society today, so anything that could potentially damage this needs to be avoided at all costs.’

A Treasury spokesman said: ‘While the Government keeps all taxes under review, no consensus for either incremental or more radical reform of pensions tax relief has emerged since the consultation in 2015.

n The Chancellor is planning a crackdown on the self- employed who avoid paying National Insurance. The Treasury believes a third of those claiming selfemployed status as a ‘personal service company’ are actually full employees and should pay more tax.

It says without reform, HMRC could miss out on £1.2billion a year by 2023.

A similar crackdown in the public sector has raised £410million extra in taxes since 2016, HMRC estimates suggest.

‘Big step in the wrong direction’