Osborne’s choice: Treasury edging towards flat rate tax relief – reports

George OsborneA pension Isa system has been put on hold, with the Treasury planning to introduce a flat-rate government contribution in replace of tax relief, according to reports in the Financial Times.

The FT reports that the Treasury has dropped the idea of a shift from Exempt, Exempt, Taxed to Taxed, Exempt, Exempt, in favour of a single rate of incentive of between 25 and 33 per cent, according to unnamed sources.

This would remove the phrase ‘tax relief’ from the system, solving the issue of non-taxpayers auto-enrolled into schemes not getting any incentive under the current system where the scheme is run on a net pay basis.

But the article says the Treasury has ‘not completely pushed the pension Isa model off the table’.

CPS fellow Michael Johnson says: “They are still asking lots of questions. The first junction in the road is whether they abandon EET in favour of TEE. If the answer is no, then the questions are relatively straightforward – what are the reliefs and what annual allowance – these determine how much money they save. That could well be 20 per cent and a £30,000 annual allowance.

“But if Osborne does stick with EET then he has to understand that he won’t get the chance to revisit it. That is why there is a reasonable prospect that TEE could happen, or that he will do something leftfield that we aren’t yet thinking about.

“Salary sacrifice an the NI issue could also feature. Remember, within a few sentences of his July announcement of a review of pension tax incentives, Osborne also opened a consultation on unifying income tax and NI.”

Hargreaves Lansdown head of pensions policy Tom McPhail says: “The FT is a robust publication and its journalists are well-connected. I would be surprised if they put a story like this on their front page unless they were pretty clear as to what the direction of travel is. My convictions are only strengthened by this. I’d guess at a £25,000 annual allowance and a 25 per cent flat rate of relief. But you would also need to abolish salary sacrifice to get the full amount of savings requried.”