Election puts pensions tax relief at risk

The upcoming general election may spell the end for generous tax relief on contributions to private pension plans.

The upcoming general election may spell the end for generous tax relief on contributions to private pension plans. As recently as a year ago, George Osborne, the chancellor of the exchequer at the time, was thought to favour scrapping up-front tax relief on pensions contribution altogether, with withdrawals from pension funds made tax-free instead. But Osborne backed away from the reforms amid a backlash from Conservative MPs and parts of the media partly due to fear of alienating voters during the run-up to the EU referendum.

However, if a Conservative government is returned in June with a much-increased majority and a five-year term ahead of it, Philip Hammond, Osborne's replacement, may be in a position to make bold changes. The £21bn annual cost of pensions tax relief is an enormously alluring pot of cash for any chancellor looking to plug holes in the public finances, and Hammond would not even need to dump tax relief altogether to make major savings. Currently, tax relief is given at savers' highest marginal income-tax rate 20%, 40%, or 45% but the chancellor could choose to cap relief with a single flat rate for all. Setting the rate at, say, 30%, would allow Hammond to present the policy as a means of redistributing support from higher earners to the less well-off, while still netting a substantial windfall.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.