Tax relief is not fiscally neutral
by Dr. Ros Altmann
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It is simply not correct to argue that taxation of pensions is fiscally neutral (Letters July 15th). This is a myth, presumably promulgated by those who fear losing the huge tax advantages of pension contributions enjoyed by higher rate taxpayers. The UK spends around £14 billion a year on tax relief for pensions, half of which goes to top rate taxpayers. Most of this money is not recouped from pensioners, due to the enormous amount of leakage in the pensions tax system. The age allowance ensures many pensioners escape tax altogether and only 2% of pensioners pay top rate tax. Tax relief for pension contributions is received on the entire amount contributed, whereas higher rate tax on the pension is only paid on the marginal amount of income above the higher rate band and then there is also the 25% tax free lump sum.
For every £3 that a higher rate taxpayer puts into their pension, the Government gives another £2. Part of this is added to the pension, but higher rate taxpayers receive nearly half the tax relief as a direct ‘cashback’ from their tax bill. There are huge incentives for those in society who least need it. It’s no wonder they are so anxious to keep this benefit. But significant sums are being wasted on subsidizing pension contributions by the better off, at the expense of the rest of society.
Dr. Ros Altmann