Higher rate tax relief on pension contributions is likely to be abolished altogether within 24 months, says Michael Johnson, the research fellow at the Centre for Policy Studies whose radical reform proposals have recently gained traction at the Treasury.
Johnson, the author of two ground-breaking reports published by the centre-right CPS think tank, believes it is more likely than not that tax relief at rates above 20 per cent will be abolished altogether, potentially as quickly as by the 2011 Budget.
Speaking to Corporate Adviser, Johnson says the opportunity for the Treasury to reap billions of pounds of savings immediately by cutting off higher rate tax relief make such a move likely, and argues that the chances of such a radical move taking place increase significantly if extra pressure is put upon state finances in the event that the economy slips into recession again.
Johnson says: “The chance of higher rate tax relief being abolished altogether within 24 months is much higher than 50 per cent, and that percentage rises if we really have a double dip.”
Johnson argues that the move announced by George Osborne in his Emergency Budget in June to replace the blanket abolition of pensions tax relief for those earning over £150,0000 with a £30,000 to £45,000 annual allowance an idea he says was perhaps adopted from his own proposals, is the first step towards a complete abolition of higher rate tax relief. This could be done at the same time as a harmonisation of the pensions regime with Isas. That annual limit was confirmed at £40,000 a year today. A complete removal of higher rate tax relief on pensions would have significant effects on the pensions industry.
A move to 20 per cent tax relief across the board would save the Treasury around £7bn a year, he says. Such
Johnson says: “This is a multistep process. Step one is the harmonised annual contribution limit of £45,000 a year across Isa and pension, with a pension limit of £35,000. That has been basically bought by George (Osborne) and is in the Budget. That was very satisfying.
“Allied to that I have suggested that tax relief, if we make that move, should initially be at the full marginal rate, rolling back on the 2009 Budget.
“Subsequently we then take a much harder look at the tax framework in its entirety, including the world of Isas, and we work towards harmonising them As part of that, pension tax relief goes back to 20 per cent for everybody.
“Most of the proposals in the whole pension space have long-term consequences and don’t deliver cash savings immediately. We need cash savings immediately and abolishing higher rate tax relief gives cash savings immediately.”