IFS Slams UK Pension Changes
Wednesday, March 3, 2010
The UK government's plans to restrict income tax relief on pension
contributions will create "complexity, unfairness and inefficiencies" in
the tax system, according to the Institute of Fiscal Studies (IFS).
Responding to the Treasury's consultation on how best the changes
should be implemented, the IFS believes that the government should
first have consulted on the policy itself, allowing the industry and
tax experts sufficient time to point out serious flaws in the
Under the new rules, first announced in the 2009 budget, individuals
with a gross income (excluding employer pension contributions) above
GBP130,000 a year whose gross income plus the estimated value of any
employer pension contribution is worth more than GBP150,000 will be
affected. Currently these individuals generally enjoy income tax relief
on pension contributions at their marginal rate of income tax (from
this April, 40% for higher rate income tax payers and 50% for those
receiving a gross income above GBP150,000 a year). The new policy means
that from April 2011 relief will be tapered down from 50% to 20%
(equivalent to the basic rate of income tax) for those whose income,
plus the estimated value of any employer pension contribution, exceeds
GBP150,000 a year. The 20% rate of relief will apply to those whose
income (measured including the estimated value of any employer pension
contribution) is equal to GBP180,000 or more a year.
“Implementing this reform will create complexity, unfairness and
inefficiencies," said Carl Emmerson, IFS deputy director.
"The government's goal is to raise money by reducing the subsidy that
the wealthy enjoy on their pension contributions. 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 from its current level of GBP437,500," Emmerson noted.
The Treasury estimates that the reform will raise GBP3.6bn (USD5.4bn) a
year and that 300,000 individuals will be affected. This equates to a
GBP12,000 tax rise per affected person per year.