As the Government announces it will be examining the current tax relief system (26 JUNE), and even suggesting a complete overhaul if necessary, Stuart Price, Partner and Actuary at Quantum Advisory, looks into what may materialise from the review.
Stuart said: “There’s no denying the current tax relief system is complex, with basic-rate taxpayers claiming 20% tax relief, and higher-rate taxpayers receiving 40%. This means, for every £1 an employee saves into their pension pot from their salary, it will only cost them 80p or 60p respectively, with the government topping up the rest. Those earning under £11,850 do not receive any tax relief on pension contributions.
“I can see only one possible outcome of the review, and that is to scrap the different rates and introduce a single flat rate for all savers. What this flat rate will be remains to be seen. If the government decide to ‘meet in the middle’ and offer 30%, this would be broadly cost neutral for the Treasury, however, if they were to introduce a 20% rate for all, it could save the Treasury around £13bn a year.
“Offering the greater value of 30% would make pension saving more beneficial and attractive for those earning less – the audience that need the most encouragement to save, however, I’m not sure the government could turn its nose up at £13bn.
“I, like many others in the industry, believe that simplifying the system is the right thing to do, so the recent announcement is definitely a step in the right direction. We’ll just have to wait and see what the outcomes are and who, if anyone, will benefit from them.”
Stuart Price, Partner and Actuary at Quantum