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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 legislation.

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.