Britain's highest earners pocket twenty times more tax relief on pension contributions than ordinary workers

Britain’s highest earners are pocketing 20 times more tax relief on their pension contributions than ordinary workers, a new analysis reveals today.

Research by the investigative website Exaro, using the Government’s own figures, found people in the UK earning more than £150,000 a year are attracting tax relief averaging £12,000 annually. This compares with just hundreds of pounds for the typical pension saver.

In some cases, top earners are pocketing pension relief worth £25,000 a year – close to average gross earnings in the country.

The analysis will increase pressure on the Government to reform pension tax relief which critics claim cannot be afforded at a time of huge public sector spending cuts.

Under the current system pension contributions are deducted before tax is paid. That means employees paying the 50 per cent top rate of tax benefit significantly more than those who pay tax at the basic rate of 20 per cent.

In September Nick Clegg, the deputy prime minister told his party’s conference that there was a “legitimate debate” to be had about the cost of pension relief for rich people.

“Tax relief does not come free,” he said.

“It is other taxpayers paying their taxes to provide a tax relief for people who are much richer than them.”

The Exaro analysis shows that tax relief on pension contributions is expected to total around £20 billion in this financial year.

Some £3 billion of this will go to a maximum of 250,000 people earning more than £150,000 a year.

Around 11 million basic-rate taxpayers are projected to share about £7 billion of this year’s total tax relief for pension contributions.

Specialists in the field say that the difference in average tax savings revealed by Exaro’s analysis – described by one as “stark” – shows that pension relief for top earners is ripe for reform.

John Whiting, director of tax policy at the Chartered Institute of Taxation, said: “Pensions are the last, great tax shelter, so it would hardly be surprising if covetous eyes were looking at this.” 

Dr Ros Altmann, a leading pension campaigner, said: “It is rather perverse to give the most tax incentive to people who need it least.”

Altmann, director general of Saga, which provides travel and financial services for the over-50’s, said that higher-rate relief for pension contributions might well be seen as “low-hanging fruit” by a government that wants to reduce its deficit.

In the run-up to this year’s budget, Danny Alexander, Liberal Democrat Chief Secretary to the Treasury, proposed allowing only a basic rate of tax relief. The cost of the extra relief for people paying income tax at 40 or 50 per cent totalled £7 billion a year, he said.

Despite the proposal reportedly being “the most live of all budget discussions” in government at the time, tax breaks for pension contributions were left unchanged. But George Osborne, chancellor, hinted in his budget speech at tighter restrictions in future.

The Coalition has already brought in pension reforms to cap tax benefits for the rich. 

Since April 2011, annual pension contributions on which tax relief can be claimed are limited to £50,000. 

Tom McPhail, head of pensions research at Hargreaves Lansdown, a leading financial-services company, said that this cap – even though it includes employer contributions – was of concern only to a minority of top earners. The £50,000 limit was “more than acceptable” for most, he said.

And from last April, the government cut to £1.5 million the ‘lifetime allowance’ limiting the size of an individual’s pension fund that qualifies for tax benefits.

The Treasury forecast that these reforms would raise extra tax of £2.3 billion in 2012-13 and £4.4 billion the following year.

The government is also cutting the top rate of income tax – and, accordingly, pension relief – from 50 to 45 per cent from next April.