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Restricting Pensions Tax Relief
The Government has considered the issue of pensions tax relief and believes reform in
this area is a necessary part of its commitment to tackling the fiscal deficit.
However, having listened to the concerns of the pensions industry and employers, the
Government has reservations about the approach adopted in Finance Act 2010. It
believes this could have unwelcome consequences for pension saving, bring significant
complexity to the tax system, and damage UK business and competitiveness.
An alternative approach involving reform of existing allowances, principally of
a significantly reduced annual allowance, might better meet the Government’s
objectives.
In line with the commitment to tackle the fiscal deficit the Government will seek to
ensure that it raises at least the same amount of revenue through restricting pensions
tax relief as has already been accounted for in the public finances over the forecast
period, and beyond that in steady state. Provisional analysis suggests an annual
allowance in the region of £30,000 - £45,000 might deliver the necessary yield. The
level required would however be influenced by a number of policy design features in
the revised regime, including the appropriate level of the lifetime allowance.
The Government recognises that various features of a much lower annual allowance
would need to be revised to ensure it operated fairly and effectively. The Government
wishes to engage employers, pension schemes, experts and other interested parties to
determine the best design of a regime, looking at a wide range of issues that will need
further consideration. Relevant issues for the Government to consider include:
• how pension accrual in DB schemes would be valued;
• options to protect basic-rate taxpayers, and to support hard cases caused by
one-off ‘spikes’ in pension accrual;
• whether and how there could be flexibility for individuals over paying any
charges that arise;
• how compliance and delivery would operate in practice.
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