Scrapping pensions tax relief for the wealthy is fair

Old couple on a seafront benchIn the build up to the Budget, pensions have been the frontrunner for government tampering and the rumours have all centred around one thing: pensions tax relief.

For those not au fait with pensions jargon, tax relief is given on all contributions you make to a personal or company pension.The relief is marketed as free money from the government as it refunds your income tax on the contribution; 20% for basic rate taxpayers, 40% for higher rate taxpayers and 50% on the additional rate taxpayers. Unfortunately it doesn't refund you in cash, it goes straight into your pension where you can't access it until age 55.

It's predicted that the government will scrap the 40% and 50% tax relief rates, meaning that higher rate taxpayers and those lucky enough to earn £150,000 or more will only receive a 20% refund on their contributions.

Predictably there has been much grumbling that it's a raid on pensions and equates to double taxation of those who have been prudent enough to save for their retirement.

But if you look at it practically it makes sense to scrap it.

The bill for tax relief tops £7 billion each year and the majority of that is paid to higher earners – and £7 billion is a lot of money for a government that is feeling the pinch.

You could argue that the government gets that £7 billion or thereabouts back when the pension is turned into income in retirement and retirees pay income tax on it. But here's the rub:

1. 25% of pension pots are taken tax-free so the government does collect any cash from that, and;

2. How many people are still higher rate taxpayers in retirement? A lot fewer than were claiming 40% relief.

Surely it can't be the mark of a progressive tax regime that we give high earners 40% tax relief on contributions but only tax them 20% when they take their income.

As for the 50% tax relief, tax experts are in agreement that it was an oversight that it was ever on offer. When you earn £150,000 a year, it's safe to say you don't need the government to top up your pension pot for you.

If we all want to benefit from higher personal allowances and a £140-a-week flat rate state pension in the future then sacrifices have to be made now, and those with the broadest shoulders should carry the biggest burden, it's only fair.

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