Millions to benefit from new tax relief on pensions

MILLIONS OF people will be able to gain tax relief on pension contributions even if they have no earnings, under radical proposals published by the Government yesterday as part of its plans for "stakeholder pensions".

Tax relief on pensions contributions is already the biggest tax break, costing the Exchequer about pounds 11bn a year, and the new proposals, contained in a joint Inland Revenue/Department of Social Security consultation document, would add an estimated pounds 750m to this bill. This is pounds 250m more than predicted in the stakeholder pension Green Paper of last December.

However, the move being introduced by Melanie Johnson, economic secretary to the treasury, has been broadly welcomed by tax experts as representing a step towards greater simplicity and encouraging individuals to save for the future. It is seen as especially beneficial to married women who may have had pensions before giving up work and who want to create retirement plans independently of their husbands.

Anne Redston, head of the pensions group at accountants Ernst & Young, said that the idea of allowing people to gain tax relief on contributions from any source up to a limit of pounds 3,600 a year was "a real breakthrough in helping people provide for their old age".

John Whiting, tax partner with PricewaterhouseCoopers, said that the proposal was "pleasingly radical" in suggesting the adoption of a system like that which applies to mortgages, where payments receive relief at the basic tax rate at source. Higher rate tax payers would then gain additional relief after the end of the tax year.

However, the Conservative Party, which earlier this week proposed slashing the tax rate for savings, criticised the proposals as representing "the end of the stakeholder pension". Michael Trend, the party's pensions spokesman, added that the move meant that the attempt to find a new kind of pension had been a waste of time.

He also claimed that a proposal contained in the document to standardise taxation for employed and self-employed workers effectively created a clear distinction between the basic tax rate and the higher rate - leaving the way open for "stealth taxes" on the better off.