Higher rate tax relief should go

The UK goes head to head with high earners on tax relief

The UK goes head to head with high earners on tax relief

Messing with tax relief on pensions for high earners has not gone down well with some of the UK’s big savings organisations.

The FT today reports that the bosses at Legal & General and Friends Provident both claim that cutting tax relief might discourage saving. Alistair Darling announced in last month’s Budget that people earning more than £150,000 a year will be restricted to basic rate tax relief on contributions.

It might discourage high earners from putting money into pensions, but no doubt they will find other ways to save tax. I don’t see why it should have any impact on the rest of us. Tax relief is not a brilliant incentive to save anyway as many people do not really appreciate how it works. If they did, there would have been an outcry years ago about the cost of higher rate tax relief.

Ros Altmann, an independent adviser to the pensions industry, has long maintained that higher rate tax relief is a waste of taxpayers money. More than half the £28bn annual cost of pension tax relief goes to top rate taxpayers, she points out. It would be much more equitable and effective to give people on lower incomes a bigger boost to their savings.

Perhaps Mr Darling did not go far enough and should have abolished higher rate tax relief on pensions altogether.

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FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.