Hunt plots £10bn tax grab from better off
Chancellor in talks about halving pension reliefs for millions of higher rate taxpayers
MIDDLE-CLASS workers face paying up to £10billion more in income tax as Jeremy Hunt considers drastically reducing the relief they currently enjoy on their pension contributions.
The Chancellor of the Exchequer is in discussions over changing tax rules designed to encourage employees to save into their pensions pots – resurrecting a George Osborne-era plan that was ultimately abandoned after objections from Conservative MPs.
Ministers have discussed reducing the rate at which income tax relief is applied on Britain’s 5.5million higher rate taxpayers from 40p to a flat rate as low as 20p. Another option being considered is to increase the number of very high earners whose income tax relief is cut even further.
The total cost of pension tax relief to the Exchequer is £42.7billion, of which £22.9billion is relief on income tax and £19.8billion is on National Insurance contributions.
A flat rate of 20 per cent would raise between £8billion and £10billion a year, according to a report by the Pensions and Lifetime Savings Association.
Last night Mr Hunt, Rishi Sunak, the Prime Minister, and their officials were assembled in Downing Street to discuss the headline policies of the Autumn Statement, which will be delivered to Parliament in a fortnight.
A Treasury source said income tax relief on pensions “has been discussed” in ongoing talks, and is still on the table. However, by last night, no “white smoke” had yet emerged.
The Sunday Telegraph understands the Government’s commitment to the triple lock on pensions is another of the major policies still under discussion, after days of Downing Street refusing to rule out it being scrapped.
By tomorrow morning, ministers must submit their plans to the Office for Budget Responsibility.
The plan to increase tax on pension contributions would amount to an income raid on any workers earning more than £50,270, who receive a tax break on the money they pay into their pensions at a rate of 40 per cent under the current system. Instead, one version of this plan would see all contributions taxed at a “flat rate” of 20 per cent, regardless of the income tax bracket the worker falls in. A second version would have the flat rate higher, such as 25 per cent, giving a boost to those who pay the 20p tax rate. Another would see tax relief on higher earners fall, but not as far as 20p.
Under current rules, a person who pays higher rate income tax for the whole of their career, contributes 12 per cent to a private pension and retires after reaching a salary of £64,000, would get £20,900 a year in retirement.
Under the planned rules, with a flat rate of 20p, the same person would earn £18,800 a year if they did not increase their pension contributions, reducing their take-home pay in the process.
The policy will be controversial among economists and Conservative MPs, who have previously warned it could result in workers saving less of their income for retirement.
A 2016 plan by Mr Osborne to enact a flat 20p rate of tax relief was abandoned after he was warned it would cause a “riot” in his party. The former chancellor has been approached by Mr Hunt in recent weeks, along with other ex-Treasury ministers, as he asks for advice on how to handle the economy.
An analysis of the policy by the PLSA last year found that higher earners would “pay more tax with the result that they receive lower pensions in retirement or reduce their take-home pay during their working life”.
It also found that the top 10 per cent of earners would lose between £34,500 and £205,700 from their pension pots over the course of their lifetimes.
Another option under consideration is to lower the income threshold at which the highest earners see their tax relief tapered off until it applies to just £4,000 in pension contributions – from its current level of £200,000.