CONDEM TAX PLANS ON PENSION TO HIT FAMILIES

The ConDem’s announcement on pensions tax today will hit families on modest incomes extremely hard.

Now everyone's at risk because the Government is taxing on the basis of people's wish to save for a pension, rather than because they are high earners.

But there was an alternative. Labour supports the principle that pensions tax relief should play a part in getting borrowing down. But under our plans no-one earning under £130,000 would lose out.

This was a key part of the fair taxes with which we planned to halve the deficit over four years. Labour opposed to the Government’s approach because it’s less progressive than our plan – which only affected people earning over £130,000. Furthermore, it sends the wrong message by taxing people because they are saving a lot into their pension, rather than because they are on high incomes.

Tax relief on pensions exists to help people save for an income in retirement.
But the cost of pensions tax relief in the UK has doubled over the last decade and the proportion of tax relief going to those on the highest incomes has risen markedly.

The introduction of the additional rate of income tax of 50 per cent applying to individuals on incomes of £150,000 and over would have exacerbated this.

The Labour Government’s aim was to deliver a system of pensions tax relief that was fair, affordable and sustainable. In the context of our commitment to halve borrowing over the next four years, Labour acted to address the disproportionate levels of relief going to high income individuals. This approach raised £3.5bn as part of our deficit reduction plan.

This meant that from 2011/12 onwards those with incomes of over £130,000, and gross incomes of £150,000 would see their pensions tax relief restricted from the current overly generous level.

The restriction took the form of a taper to apply for those on gross incomes between £150,000 and £180,000, gradually reducing tax relief on pension contributions until it is restricted to the level received by basic rate taxpayers - 20 per cent.

The restriction would apply to only 300,000 individuals, about 2 per cent of pension savers, or around one per cent of working-age taxpayers.

These individuals currently receive around a quarter of all tax relief on pension contributions – on average receiving £20,000 per person in tax relief, compared to £1,000 for basic rate taxpayers. Individuals with incomes of less than £130,000 were completely unaffected by this change.


But the ConDem coalition argues that Labour’s restriction of tax relief for the richest individuals is too complex. They have set out an alternative approach which that restricts the annual allowance to £50,000, significantly below its current limit of £255,000. On top of that, the lifetime allowance will be reduced from £1.8 million to £1.5 million – which caps the total someone can put into a pension.

The Government has said its will raise around the same amount of revenue as our approach – peaking at £4bn a year. They also say that 100,000 people will be affected and estimate that 20% of these earn under £100,000.

Their approach means that the revenue is being raised from those that make significant pension contributions, rather than simply those on very high incomes as under Labour’s plans.

Because some individuals make very large pension contributions relative to their income levels, this potential alternative approach would affect people on incomes well below the £130,000 cut-off in our approach.

There are also other questions to be raised about the ConDem’s approach. Given that the Government’s proposals will affect some on much lower incomes that would be affected by Labour’s plans, they need to say what is being done to raise awareness of this change. They should also identify how did those without financial advisors have a voice in the development of this approach, to match the lobbying by the very rich that has persuaded the Coalition to water down the impact on them?