Pension reform will lead to unfairness: IFS

The forthcoming restriction to income tax relief for high-income individuals will lead to ‘complexity, unfairness and inefficiencies’, the Institute for Fiscal Studies (IFS) has warned.

The new measure will see relief being tapered down from 50% to 20% (equivalent to the basic rate of income tax) for taxpayers whose income, plus the estimated value of any employer pension contribution, exceeds £150,000 a year. A 20% rate of relief will apply to individuals whose income, measured including the estimated value of any employer pension contribution, is equal to £180,000 or more per annum.

The Treasury estimates the reform will raise £3.6 billion a year and that 300,000 individuals will be affected. If correct, mean tax increase would £12,000 per affected person per year, said the IFS.

The thinktank dismissed the argument that it is unfair that higher-income individuals currently receive relief at a more generous rate than lower income individuals, saying such reasoning ignores the fact that tax is paid on pension income when it is drawn.

Individuals who receive relief at the higher rate of income tax when they make pension contributions, and who are also higher-rate income taxpayers in retirement, receive income tax treatment that is no more generous than individuals who pay the basic rate throughout their lives, said the IFS.

Deputy director Carl Emmerson remarked: ‘Implementing this reform will create complexity, unfairness and inefficiencies. The Government’s goal is to raise money… but many people on high incomes will still be able to receive unrestricted income tax relief on their pension contributions: for example, by making greater use of salary sacrifice arrangements. A better approach would be to reduce the amount that individuals can take tax-free from a private pension.’

Such a reform would improve value for money for the public purse because there is no obvious justification for providing the current tax-free amount of £437,500, claimed the IFS in its response to the Treasury consultation on the matter.

The institute suggested that placing employer National Insurance on employer pension contributions would be a better move because it would provide a less opaque and better-targeted subsidy in favour of employer contributions.

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