David Prosser: An easy £7bn gain for the public finances

 

Outlook It has long seemed peculiar that during a period when the public finances are so stretched, we continue to spend billions of pounds on a tax relief for savers who really do not need it.

To be specific, the Treasury Minister David Gauke disclosed earlier this year that were tax relief on private pension contributions to be limited to the 20 per cent basic rate of tax, the gain for the exchequer would be £7bn a year.

So why has Mr Gauke's boss, the Chancellor, not announced such a change to the tax system? Well, the traditional arguments in favour of the status quo are twofold: first, that we want to encourage people to save for retirement and second, that since we tax people on their pension income, not to offer relief at the highest marginal rate on contributions made from taxed income today would eventually amount to double taxation.

A new paper from Dick Newby, published yesterday by the Centre Forum think-tank, addresses that crucial second point. Lord Newby says the steady decline in annuity rates means only a tiny number of higher-rate taxpayers continue to pay the top rate of income tax once they retire and start living off their pension savings. He calculates you would need a pension pot worth £1.35m. And with the lifetime pensions savings cap now set at £1.5m, even pensioners caught by the double taxation loophole would still be paying an average rate of income tax below 20 per cent.

One imagines George Osborne, bruised by the ongoing row over the 50p tax rate, is not inclined to risk another row with high earners. But the Chancellor should be brave – the £7bn on offer from this reform is the sort of low-hanging fruit that is in very short supply.

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