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.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Interactive / Mobile Developer

£40000 - £45000 per annum: Recruitment Genius: This digital production agency ...

Recruitment Genius: PHP Developer - Midweight

£40000 - £45000 per annum: Recruitment Genius: This digital production agency ...

Recruitment Genius: Junior Front End Developer

£20000 - £30000 per annum: Recruitment Genius: This digital production agency ...

Recruitment Genius: Front End Developer - Midweight / Senior

£35000 - £40000 per annum: Recruitment Genius: This digital production agency ...

Day In a Page

Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

Uganda's giants are flourishing once again

After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

After 350 years, the riddle of Britain's exploding fleet is finally solved

Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
Airbus has patented a jet that could fly from London to New York in one hour

Airbus has patented a jet that could fly from London to New York in one hour

The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

Tate Sensorium

New exhibition at Tate Britain invites art lovers to taste, smell and hear art
10 best sun creams for kids

10 best sun creams for kids

Protect delicate and sensitive skin with products specially formulated for little ones
Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

Nice guy Finn is making up for lost time – and quickly

He was man-of-the-match in the third Test following his recall to the England side
Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

Remember Ashton Agar?

The No 11 that nearly toppled England
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks