Tax raid ‘ to end pension saving for middle class’
MIDDLE- class savers could be better off buying a bigger home than paying into pensions if George Osborne goes ahead with a tax raid on high earners, a report has warned.
Experts said the “squeezedmiddle” would bear the brunt of proposed changes to the tax relief system and may be discouraged from saving.
Analysis carried out by the Institute for Fiscal Studies suggests that measures expected in the Budget next month may mean higher rate taxpayers are for the first time better off putting their cash into Isas or larger homes.
Under the current system, workers earning more than £ 42,385 – that is, higher rate taxpayers – receive a £ 2 boost from the Government for every £ 3 they save into a pension.
Savers receive pension tax relief at the highest rate of tax they pay, which could be 20, 40 or 45 per cent.
The Chancellor is considering replacing that system with a flat rate of relief for everyone, whether they pay the basic rate or a higher rate.
The IFS said this would deter higher- rate taxpayers from saving for retirement, while basic rate taxpayers would have more incentive to save. It cautioned that if relief was changed to a flat rate below 30 per cent, those who had already paid more tax during their working lives would “lose out” in retirement.
The report said: “As far as tax is concerned, they would be better off saving for their retirement via an Isa or a more expensive home.”
Conservative MPs have warned Mr Osborne that he will face a backlash from Tory voters if he pushes ahead with the plans.
Experts fear the changes could leave millions facing a retirement crisis. The IFS report says that at present pension saving is one of the best investments, as it is effectively subsidised by the Government.
But it adds: “The Government is considering what would be among the most radical changes to savings taxation in decades.”
At present, basic- rate taxpayers receive a £ 20 top- up from the Government for every £ 80 they pay into a pension.
Higher- rate taxpayers receive £ 40 for every £ 60, while top- rate taxpayers get £ 45 for every £ 55.
Under plans for a flat rate relief of 25 per cent for all, savers will receive £ 25 for every £ 75 they contribute.
The move could save the Treasury £ 6billion.
Chas Roy- Chowdhury, of the Association of Chartered Certified Accountants, said: “Higher- rate taxpayers are being fleeced by the Government. They work hard and are being punished for it.”
Chris Noon, of pensions consultancy Hymans Robertson, said: “It takes tax relief away from higher rate taxpayers, which is a problem as this is the group facing the biggest savings shortfalls in retirement.”
A Treasury spokesman said that it was still considering all options on pensions tax relief, including retaining the current system.