Is The Idea of Flat Rate Pension Tax Relief A Good One?

Is The Idea of Flat Rate Pension Tax Relief A Good One?

Chancellor George Osborne has always – so he says – wanted a tax system that was simpler for the general public and companies alike to comprehend (and therefore get right). But so far that hasn’t happened. In fact, if anything, the tax system is now even more complicated than ever before (which is why accountants like us are constantly updating our learning so that we can offer the most up to date and relevant advice).

Osborne’s next move, according to reports, is to shake up the pension tax relief system. At the moment, pension contributions can be deducted from taxable incomes, which gives 40-45% relief to those contributing from the highest tax bracket. However, Osborne’s potential new system will offer a flat rate of 30% instead, no matter what the income of the person contributing.

And for those whose employers top up their pensions, things will also change. These contributions will be considered ‘benefits in kind’ and therefore taxed at either 20 or 40%, after which the 30% subsidy from the government will be added. It’s getting complicated now, and it doesn’t seem as though anyone will be any better off with the new system – in fact, some (especially higher earners and those with a company pension) will be worse off when it comes to cashing out their money. Some has suggested that it is almost like a fine for paying into a pension.

As for those who pay the basic rate of tax, they will be able to pay into a pension and receive a 30% subsidy, and then withdraw the money but only pay 20% tax on it. This new system – if it ever comes into effect, which is possibly doubtful – is open to abuse because of this.

It seems a strange thing to do. After all, those who are already paying a high tax rate on their income do, by that very definition, have more money to contribute to a pension. Plus, by paying in at 40%, and then withdrawing at 20% (the current system), when these high earners are no longer earning they will have enough to live on. By reducing the contribution down to 30% there is the potential for many of them to need additional top ups from the government anyway.

 

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