Govt urged to replace tax relief rules with pension top-up system

The retail fund platform published a policy paper on Wednesday in which it urged the government to announce a review of the UK’s pension tax rules in the upcoming March Budget.

Under the current rules, tax relief is paid on savers’ pension contributions at the highest rate of income tax they pay. 

But under Hargreaves Lansdown’s proposals, all employee contributions would be doubled, irrespective of their tax bracket across three tiers of reforms.

For example, under tier one, tax relief would be abolished on employee contributions, but the employer’s contribution would double. 

Under tier two, generous employers would have the option to offer employees the right to pay up to an additional 5 per cent of pay into their workplace pension. Every additional £1 would then be matched by their employer.

The last option is a £10,000 individual savings allowance for those ineligible to save in a workplace pension, such as the self-employed, which would be matched by the government.

Nathan Long, senior analyst at Hargreaves Lansdown, said the government must reform the tax relief system now before it gets worse in the future and becomes even more complicated.

He said: “Both the tapered annual allowance and net pay anomaly are horrible issues and to solve them in isolation will have knock-on consequences.

“They both heap a lot of complexity into the system, and our view is that we need a simple solution and we can do this now and change the system to remove complications.

“One of the things we are getting more agitated by is that tax relief is supposed to be used as an incentive for people to save, but what has happened is that it has become a subsidy for people to save.”

Mr Long added: “It is time to reexamine this system and ask whether this is the best way to incentivise people to save more. In the Budget, we want to see a consultation that tackles these issues and to not just have a sticking plaster over the two headline issues at the moment.”