Budget shake-up that could end up hurting young savers

CUTTING pensions tax relief for higher earners remains a political hot potato for the Chancellor.

Philip Hammond is clinging to his job – and a raid on middle-class savers would cause uproar in the Tory heartlands.

In simple terms, tax relief on pensions means that you get a refund for the income tax you paid on money going into your pension pot.

So basic-rate taxpayers get 20 per cent, higher-rate payers 40 per cent and top earners get 45 per cent.

There are suggestions that Mr Hammond could axe the top two rates of relief and instead have a flat rate of about 30 per cent for all. That would undoubtedly offer a savings incentive to young people who earn less than £45,000 a year (the point where you start paying 40 per cent income tax).

But it’s one thing offering a better incentive to people in their 20s and 30s, and another altogether for them to find the spare cash they need to claim the perk.

Not many will be able to justify prioritising their retirement, which will be decades away, ahead of the tall task of saving for a deposit on their first home.

Most young people only start saving seriously for a pension when they get a bit older and their wages increase. In other words, by the time today’s young workers really care about their pensions they will find the tax break has been whittled away – and will feel robbed of perks their parents got.

You can see why the Chancellor is eager to wield his axe.

Pensions tax relief – at £50billion a year – costs the Government half as much as it spends running the NHS.

Realistically, the only way Mr Hammond can make savings without disenchanting voters is to cut the annual amount savers can squirrel away tax-free. He might be able to reduce the annual allowance from £40,000 to £20,000 without too many complaints. That would still be more than most people could put away each year, after all.

There would need to be an exception for the self-employed and small business owners, as their incomes vary and many plan to sell their business in order to fund their retirement.

However, the Chancellor must resist the temptation to meddle with the lifetime allowance of £1million. That would only punish successful investing and put a cap on aspiration.