Flat-rate pensions ‘tax relief’ would be devoid of any economic rationale
Calls to overhaul pension tax relief by scrapping higher rates of relief and setting a so-called ‘flat rate’ ‘tax relief’ are misguided. Such proposals would also face huge practical problems and lead the tax system to become even more complex.
Pension tax relief has been criticized as being expensive and skewed towards those on high incomes. But:
- Estimates of the ‘cost’ of tax relief under the current system hugely over-estimate the real cost.
- Those on high incomes receive more relief largely because they pay more tax.
- For those who are paying higher-rate tax in retirement, the current system of tax relief largely involves the deferral of tax until retirement as tax is paid on pensions received. A lower rate of tax relief would effectively fine such people for making contributions.
- The fact some people can receive tax relief at 40 per cent and only pay tax at 20 per cent in retirement is a desirable feature of and not a problem with the current system of tax relief as it ensures more equitable treatment of people whose earnings vary over their lifetime.. The existence of the tax-free lump sum does cause serious problems within the current system. It leads to the requirement for complex tax regulations to prevent abuse and significantly and unjustifiably benefits people on higher earnings. It should be abolished or (phased in) to limit of around £30,000. This would facilitate huge simplification of the tax system surrounding pensions.
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