Treasury could wipe thousands off nest eggs of high earners in pension tax raid

Treasury officials are understood to be recommending a dramatic shift to the tax regime for pension contributions to raise billions of pounds. Proposals put to the Chancellor, Rachel Reeves, include a new flat rate of tax relief on pension contributions of 30 percent.

This would cut the tax relief available to higher rate taxpayers – currently 40 per cent on earnings over £50,000 and 45 percent on earnings over £125,000.

This group, which makes up 11 percent of workforce – around 6.1m – could potentially lose £2,600 a year in terms of tax relief on their pension contributions.

However, the change would also mean that the vast majority of workers – more than 85 percent – would see the tax relief they get on pension contributions rise from 20 percent to 30 percent. This could save them £230 a year.

The Institute for Fiscal Studies (IFS) estimates that the net effect of the changes would be to raise £2.7 billion a year from workers to boost government coffers.

Under the current regime it costs a higher rate taxpayer £60 to put £100 into their pension pot. By contrast it costs a basic rate taxpayer £80 to put in the same £100.

It is reported that the proposals raised by Treasury officials would see all workers, regardless of income, contribute £70 for each £100 added to their pension pot.

The Chancellor is thought to support the idea of equalising the tax relief available on pension contributions.

It is estimated the current tax relief rules on pension contributions costs the Exchequer more than £50bn. The government is under pressure to claw back some of this to help fill a black hole in tax and spending plans.

Some campaigners and economists have suggested that tax relief on pension contributions might be limited to a lower 20 percent. Doing so would represent a £15.1bn tax rise, which the IFS has said would equate to a 2p rise in the basic rate of income tax.

The think tank said this “substantial increase” in tax would be shouldered almost exclusively by the top 20 percent of earners, with the top 10 percent facing an average hit of £4,300.

In 2018, when Rachel Reeves was chairman of the Business Select committee, she wrote a 66-page document outlining a string of tax reforms, including limiting tax relief on pensions.

At the time, she said: “Forty per cent of UK wealth is held in private pension funds. To combat this inequality, higher rate pensions contribution reliefs could be restricted.”

Two years earlier, in 2016, she proposed setting the relief at a flat rate of 33 percent. Experts said a 30 per cent tax relief rate would force the Treasury to restrict salary sacrifice pension schemes, which currently provide a tax-efficient way for employers and employees to pay into a workplace pension.

Sir Steve Webb, a former pensions minister and partner at pension consultants LCP, said having a single rate of tax relief on pensions would be complex and could see major employers cut their contributions to staff pension schemes.

Sir Steve told the Telegraph: “Giving everyone the same rate of tax relief on their pension contributions might seem fair, but it would be extremely complex to implement for the millions of workers in traditional salary-related pension schemes.

“The bulk of contributions in such schemes comes from employers and are made without any deduction of tax.

“If higher earners lost higher rate tax relief they would potentially face a tax surcharge not just on their personal contributions but also on the contributions their employer makes directly to the scheme. This bill could run into thousands of pounds a year in some cases.”

A Treasury spokesman said: “We have set out the need for economic stability and we have begun fixing the foundations so we can grow our economy and keep taxes, inflation and mortgages as low as possible.”