On the go: The Institute for Fiscal Studies has called on the government to put a stop to the “ludicrously generous” tax treatment of inherited pensions, rather than tinkering with pensions tax relief in next month’s Budget.
The independent economic research organisation said that although cutting pensions tax relief for high earners would bring in more than £11bn, it would go against one of Boris Johnson’s election pledges.
The think tank said a better option to improve the taxation of pensions would be to reduce the tax-free lump sum retirees can draw, which is currently set at 25 per cent. It also suggested imposing national insurance contributions on employer contributions to pensions, and ending the tax treatment of inherited pensions.
Under current rules pensions are not counted as an individual’s estate for inheritance tax purposes. The current IHT threshold is £325,000 per person, and anything above this limit is subject to 40 per cent tax.
Paul Johnson, director of the IFS, said: “Rishi Sunak’s first Budget could be the most important fiscal event in years – it will set the direction of policy for the next five years.
“If this new government is going to make radical change to taxes and spending, this surely is the time to do it.
“There are plenty of tax rises that would both raise revenue from better-off individuals and improve the coherence of the tax system.”
Before Sajid Javid resigned suddenly from his role as chancellor earlier this month, he was considering cutting pensions tax relief for high earners in his Budget on March 11, in a bid to make the system fairer for those on lower incomes.
The issue of pensions taxation is still expected to be addressed when Mr Sunak – Mr Javid’s replacement – presents the Budget next month, just 27 days after taking office.
Tax relief under current rules is paid on savers’ pension contributions at the rate of income tax they pay.
But the government is toying with the idea of cutting tax relief to 20 per cent across all income bands, rather than having the 40 per cent enjoyed by higher earners.
According to the IFS, this would increase the income tax bills of those earning more than £50,000 a year, for whom Mr Johnson pledged income tax cuts before becoming prime minister.
