The National Association of Pension Funds, whose members control pounds 350bn of employees' savings, is warning that a cut would prompt both employers and employees to flock away from pension saving. A higher-rate taxpayer who pays pounds 60 to a pension currently receives an extra pounds 40 in higher-rate tax relief. A basic-rate taxpayer making the same payment sees just pounds 23 going in to a scheme.
The extra tax relief for higher-rate payers costs the Treasury pounds 800m a year, prompting speculation that Gordon Brown, the Chancellor of the Exchequer, will limit tax relief to the basic rate of tax in his 17 March Budget.
The NAPF warned that a cut would "torpedo" schemes to which 8 million workers belong. Peter Murray, NAPF chairman, said: "Employers who provide occupational pension schemes will put up with only so much before they decide it is no longer worth the cost and hassle of coping with constant change."
Employees making payments from their own pay would be worse off than those in non-contributory schemes. An employee earning pounds 40,000 contributing 5 per cent would see a reduction in take-home pay of pounds 340 a year.