In the run-up to the Budget in March, Danny Alexander was pushing for the abolition of higher-rate relief on pension contributions, which would save the government £7 billion plus a year. George Osborne didn’t include it in his Budget, but today the Liberal Democrat gets support from a perhaps unlikely quarter: the Centre for Policy Studies. Echoing the Chief Secretary to the Treasury’s analysis, Michael Johnson’s CPS report says:
‘Today’s tax-based incentives to save for retirement are hugely expensive and, worse, ineffectively deployed. Skewed towards the wealthy, they do far less than they should to minimise pensioner poverty. Furthermore, they do little to catalyse a savings culture amongst younger workers, thereby exacerbating the looming generational inequality.’
Johnson recommends abolishing the higher-rate relief as part of a larger reform of pension tax reliefs. And indeed the CPS did suggest scrapping it back in February, as one way of paying for a corporation tax cut.
Osborne may have rejected it then, but if he’s looking for more savings to keep his deficit reduction programme on track, this is one of those rare policies that would please both the Lib Dems and Thatcher’s favourite think tank. On the other hand, the Chancellor might be afraid that any tax change with ‘pension’ in the title — even one that doesn’t affect pensioners, and only affects high-earners — risks repeating the ‘granny tax’ headlines that followed the Budget.
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