By James Tanswell

In the run up to any budget or General Election, there are always rumours circulating regarding the abolition of pension tax relief. In fact, whenever the Government looks to save money, pension tax relief seems to be a likely target.

Therefore, many pension savers will be pleased to hear that the threat of cuts to the current system have been publicly neutralised by David Gauke, the Work and Pensions Secretary.

Mr Gauke released a statement on the 4th July, saying that he doesn’t expect to see any fundamental changes in the near future.

What is pension tax relief?

Essentially, it is a Government top up to money paid in to a pension:

• Basic rate taxpayers: Get 20% tax relief, meaning that a contribution of £80 is topped up to £100 
• Higher-rate taxpayers: Get 40% tax relief, 20% is added to their contribution and a further 20% can be claimed through the self-assessment system. In other words, an £80 contribution receives tax relief of £20, making the total contribution £100, but the net cost to the saver is just £60 

The future of the popular incentive, which costs the Government billions of pounds each year, has been uncertain since the Conservatives considered, but ultimately abandoned, the idea of scrapping it.

Mr Gauke commented: “Certainly the idea of trying to reform pensions tax relief in the previous parliament was somewhat daunting. I don't think recent events have in any way changed that. So I think there will continue to be a bit of a debate on this issue but at the moment I don't see that there is a particular consensus emerging in that, and in the event of that then I wouldn't expect to see any fundamental changes in the near future.”

What would losing pension tax relief mean?

In the Government’s early plans for scrapping tax relief, ideas for an alternative included:

• Launching a Pension ISA
• Introducing a flat rate system 

A Pension ISA would see people paying into the pension from taxed income, and not being taxed on any withdrawals. Currently the first 25% of a pension can be accessed tax-free from the age of 55, but the rest is taxed at the usual rate of taxation.

According to the Government’s early plans, a flat rate system would mean that basic-rate taxpayers get a boost to their pension pot, whereas higher-rate and additional rate taxpayers would not.

Jon Greer, Head of Retirement Policy at Old Mutual Wealth, said: “For a couple of years there has been a cloud of uncertainty hanging over the future of pension tax relief after the government consulted on reforms, which may have dramatically curbed the pension perks available for higher rate taxpayers. With recent figures showing the level of saving at a record low, now may not be the time for an overhaul of the pension tax relief system. Thankfully, Mr Gauke today said that he did not believe there was any appetite to push ahead with an overhaul of the pension tax relief system, giving millions of pension savers reassurance savings incentives will not take an unwelcome hit. While there has been some discussion about moving to an alternative system, there has been no consensus view of what that system would look like. Given this, it’s unlikely that we will see a change to this system in the short term.”

It is unclear how long pension tax relief will stay safe for, however in the 2015/16 tax year it cost the Government an estimated £38 billion. Only time will tell if it will stay safe for the long-term. For more information about pension tax relief, don’t hesitate to get in touch by calling the number at the top of the page.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.