On the go: Former chancellor of the exchequer Sajid Javid has called for a flat-rate pension tax relief as part of a wide-ranging post-Covid recovery plan published by the Centre for Policy Studies.
Mr Javid, who resigned from the government in February, advocated the move as part of a proposed “system-wide review of the UK tax system, with a general shift away from taxing incomes and profits towards fairer, more progressive taxation of property and tightening reliefs, which favour the wealthy”.
Switching from the current tax relief system based on marginal rates to a flat-rate bonus paid regardless of tax code would be part of a package to “avoid permanently higher borrowing”, with the ambitious aim of balancing the budget within three years of a return to normalcy following Covid-19, according to the CPS report.
Arguing that the cost of the current system “far outweighs” the tax paid by retirees on pension payouts, the report states that the purpose of a flat-rate tax relief is to “significantly increase the incentive to save for low earners and the self-employed” while also “potentially bringing substantial savings for the exchequer”.
“Previous CPS research has suggested combining such a flat-rate savings bonus with a broader shift to an Isa-style pension system, which we urge the government to consider,” the report states.
The move has been publicly endorsed by PensionBee, the chief executive of which, Romi Savova, argued that “the tax relief system we have today is not fit for purpose, and too many people continue to miss out on this crucial benefit”.
“There are two ways consumers currently receive tax top ups on their pensions and each is poorly understood by the public,” she explained. A ‘net pay’ approach under which contributions are deducted before income tax, and a ‘relief at source’ approach used for personal pensions, which requires providers to claim basic-rate tax top ups and put them into a pension.
Research shows that “consumers on lower incomes, and particularly women, do not receive any of the tax benefits because they are currently under the basic-rate threshold,” Ms Savova said.
Meanwhile, at the other end of the spectrum, analysis by PensionBee claims to show that higher and additional-rate taxpayers “are likely to be missing out on around £1bn in unclaimed tax relief each year by not completing their self-assessment,” she continued
Calling for a universal rate of 30 per cent to “level the pensions playing field”, Ms Savova said: “The dual system is too complex and radical reform is urgently needed.”
Separately, Mr Javid and the CPS stopped short of explicitly calling for an end to the triple-lock – long rumoured as a potential outcome of the coronavirus crisis – citing the politically sensitive nature of the move and acknowledging that the government would be reluctant to be seen to renege on its manifesto commitments.
