Lib Dems put pension tax breaks for the richest under scrutiny again

Liberal Democrat pressure in the coalition government has already secured significant reductions in the tax breaks for the very richest. However, these tax breaks are still sufficiently generous that there is the scope for raising plenty more money without introducing punitive tax rates.

For example, restricting the tax relief on pension contributions to 20% (the standard rate for most people) rather than the current 40% for those earning over £100,000 would raise over £3.5 billion more each year. Last year, in a clear sign of the way in which senior Liberal Democrats are thinking, David Laws asked a series of Parliamentary questions fleshing out the details of what would be raised by different moves.

So it is no surprise that Danny Alexander has returned to the theme in the Daily Telegraph:

Danny Alexander, a Liberal Democrat Cabinet minister, says the better-off are receiving overly-generous tax relief when they invest money for their retirement.

Mr Alexander’s proposals would see tax relief halve from 40 per cent to 20 per cent. He also wants workers on the minimum wage, who earn up to £12,500 a year, to pay no income tax at all.

Mr Alexander claims that removing the higher-rate tax relief would save the Exchequer more than £7 billion and make the system fairer. Even restricted to those earning more than £100,000 the Treasury could save £3.6 billion.

“If you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate,” Mr Alexander told The Daily Telegraph.

His remarks may open up a new dispute between the Tories and Lib Dems over tax. They are already at odds over Lib Dem calls to keep the 50p top rate of tax and introduce a “mansion tax” on high-value homes. George Osborne, the Chancellor, is expected to strongly resist any calls to scrap higher-rate tax relief.

Arguing for cutting pension tax breaks for the richest in order to fund income tax cuts for millions is both sensible economics and smart politics. Sensible economics – because the net effect does not undermine the struggle to cut the deficit and in fact is likely to cause an economic boost with the extra spending caused by the income tax cut greater than the reduction in spending caused by the tax rise. Sensible politics – because once again it puts the Liberal Democrats on the side of tax cuts for the millions whilst the Tories are on the side of the very richest.

* Mark Pack is Party President and Co-leader of the party. He is editor of Liberal Democrat Newswire.

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10 Comments

  • “In 2008-09 individuals with income over £150,000 represented only 1.5 per cent of pension savers, yet received a quarter of all tax relief on contributions (£6.1 billion). This amounted to an average of £27,000 per person for higher earners, an amount in excess of the median wage, and compares with an average of £1,000 for people who pay income tax at the basic rate.”

  • Daniel Henry 11th Feb '12 - 1:14pm

    Good quote Adam. Redirecting this tax break towards the lowest earners would be a much fairer and economically competent approach.

  • @Stephen, one of the problems is that there are reliefs at every stage – such as tax-free lump sums – “effectively allowing a quarter of pension assets to receive triple exempt (EEE) treatment”. I’m not sure which relief it’s preferable to remove but I’d love to see some action taken.

    I think the quotes I’ve given are ultimately from http://www.centreforum.org/index.php/14-news/releases/268-enoughs-enoughs-time-to-limit-pension-lump-sum-tax-relief which is a good read.

  • The problem with this proposal is that (unless you get an employer contribution) the only sensible reason to take out a pension is to gain 40% tax relief now and pay 20% tax when you draw your pension. Otherwise, you’re better off putting your money in ISAs and preserving your flexibility. Removing higher-rate relief would simply destroy private pension saving altogether. Rather than removing the 40% tax relief for the higher paid, the LibDems should be campaigning for all pension contributions to receive 40% tax relief, even for people on 0%, 10% or 20% rates of income tax.

  • Geoffrey, prolonged foot dragging??? And you make it sound like it’s easy for Danny and Nick to agree these things with the Tories. It’s clearly not easy, given the Tory priorities. Given this fact, it’s amazing how much they have achieved already.

    The first coalition budget reduced the threshold on pension contribution relief from £255k pa to £50k pa for the 2010/11 tax year – a major win for us, the Tories wouldn’t have ever done this themselves. The leadership was clear that the 50% rate has to stay right from the beginning, and won that battle too.

    And how is CGT rate a disappointing compromise? Our manifesto commitment was to raise it above the income tax rate of 20%, this was achieved, and more.

  • Also, cliff-edges in the tax system are a really bad idea. You don’t want people who are earning £99,000 a year and making £40,000 of pension contributions begging their employers to not give them a £2,000 pay rise since that will cost them £6,800 per year (£2,000 extra income less £800 extra tax on that income less £8,000 of lost tax relief on the pension contributions). It might be OK to restrict pension tax relief on earnings over £100,000, but not to restrict all pension tax relief on people earning over £100,000.

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