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08

Fresh calls to scrap pension tax relief

Open-access content Friday 31st August 2018 — updated 5.50pm, Wednesday 29th April 2020

The UK government should abolish pension tax relief and replace it with bonuses on individual and employer saving contributions, the Centre for Policy Studies (CPS) has said.


31 AUGUST 2018 | CHRIS SEEKINGS
Tax reforms proposed to help low-earners ©iStock


The think tank argues in a new report that the current system is too complex, costly and inflexible, leaving many savers disengaged, and costing the government billions.

It notes that the top 1% of earners currently receive double the pensions tax relief of half the working population, and says reforms would particularly benefit people on low incomes.

"Tax relief costs the government billions, but 68% flows to higher and additional rate taxpayers who do not need such a large incentive to save," report author, Michael Johnson, said.

"The government should focus its reforms on proposals which do the most towards creating a broader savings base - such as replacing tax relief with bonuses on contributions."

These bonuses should be completely disconnected from tax-paying status, according to the report, which also argues that a "generous cap" be placed on how much people receive.

In addition, Johnson recommends that the minimum earning threshold for auto-enrolment be scrapped, and that a workplace ISA be introduced for employer contributions.

This ISA would be locked in until the beneficiary reaches 60, with rebates on NICs replaced by bonuses on employer contributions paid directly into employees' accounts.

As well as helping low-income earners, the CPS said these reforms would boost gender equality by helping to tackle the 'net pay' problem.

Furthermore, it is thought that many more low-paid people could enter pensions auto-enrolment if these reforms are combined with 'total aggregate earnings' determining contributions.

"And the process for determining contributions would be substantially simplified," the CPS said.

"Indeed, implementation of these reforms would dramatically simplify the savings landscape for people in all income brackets."


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This article appeared in our August 2018 issue of The Actuary.
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