Threat to end higher rate tax relief on pension scheme contributions

[Paul_P]

I read yesterday that Danny Alexander, the Lib Dem Chief Secretary to the Treasury has raised the possibility of ending higher-rate tax relief on pension scheme contributions in the next budget. This was a LibDem manifesto commitment at the last election but was not in the Coalition Agreement.

Is it a fair argument to say that higher rate relief is not unfair as it helps make up for the fact that the second state pension (which many of us can no longer contract out of) is very heavily weighted in favour of the lower paid?

[factor-fiction]

I think that higher rate relief is not unfair, but maybe for a different reason- simply because they have paid tax at 40% and so any relief should be at the same rate. I no longer pay tax at 40% but the rate does kick in pretty early nowadays and many people who do not consider themselves well off (teachers, skilled labourers doing overtime, etc) now find themselves paying some tax at 40%. And some of those better off employees who get tax relief at 40% may also have to pay tax at 40% on some of their pension.

Having said that, I think that the tax benefits of pension tax relief are only worthwhile for higher rate taxpayers. For a basic rate tax payer they may get relief at 20% but as the eventual pension income is taxed at 20% there is no real benefit, so (when coupled with the existence of means tested pension credit) it's not surprising so few people make enough provision for retirement.