The Times online reports that Treasury officials are investigating plans to introduce a flat rate for pensions tax relief in a move that would penalise well-off savers but reward those on lower incomes, while raising about £4 billion a year for the NHS.
The proposals, which are in the early stages of investigation, would help the Chancellor raise money for the health service and other overstretched areas of public spending such as social care, without breaching his fiscal rules.
It is one of a number of options under review to find ways of funding the government’s £20 billion pledge for the NHS last month.
One option under review is setting a flat rate of pension relief at 25p. It could be controversial by hitting the tax breaks enjoyed by higher earners, but it would increase the breaks for basic rate taxpayers to ensure there are “winners” from the policy.
Pensions relief was originally designed to avoid double taxation as individuals only pay tax when drawing their pension. In theory, people are expected to pay the same rate on their pension income as their workplace earnings. In practice, many higher rate taxpayers enjoy 40 per cent relief as they build up their pension – but only 20 per cent when they draw it down (only 1 in 7 working higher rate tax payers are still higher rate tax payers in retirement).
By setting a flat rate of 25p, higher rate earners would lose out but there would be a tax incentive to save for anyone who expects to pay basic rate on their pension income. The Resolution Foundation think tank has calculated that a 25p flat rate would raise £4 billion a year for the exchequer and has estimated that the neutral flat rate, at which the government makes no money, is 28p.
One attraction of a 25p flat rate is that it might win the support of the Labour Party, making it easier to push through parliament. Parliamentary arithmetic makes it difficult for the government to raise taxes.
While Treasury officials are looking into the policy, it is still a long way from the autumn budget and no decisions have been made.
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