Labour and Tories under fire over pension tax relief plans

Posted by | April 29, 2015 | News

Think tank the Institute for Fiscal Studies (IFS) has hit out at the Labour and Conservative parties over their plans to reduce pension tax relief.

The Conservatives plan to reduce the annual allowance for those with taxable incomes over £150,000 so that it falls from £40,000 to £10,000 by the time income reaches £210,000.

Labour said that would fund a reduction in tuition fees by reducing the lifetime allowance from £1.25 million to £1 million, reducing the annual allowance from £40,000 to £30,000 and reducing the current 45% pension tax relief for those earning over £150,000 to 20%.

To read more about each party’s tax and pension pledges clickhere.

The IFS said the Tories’ plans would bring ‘added complexity’ to the tax system. It said: ‘It is not really clear why someone earning £150,000 should be able to receive income tax relief on £40,000 of pension saving while someone earning £250,000 should only be able to receive relief on £10,000 of pension saving.’

Of Labour’s plans, the think tank said one of the main dangers would be the introduction of a ‘cliff edge’ where some workers who increased their contributions would be worse off.

It said Labour’s plans to reduce the annual allowance would: ‘move us further away from an appropriate pensions tax regime and does so in a way that penalises those making occasional large contributions rather than frequent smaller contributions.’

The IFS also accused both parties of tampering with already sensible tax structures: ‘The frequency and direction of reforms to pension taxation under this government has been concerning. The continued desire to dismantle an important and relatively sensible part of the tax system is more worrying still.’

The Liberal Democrats, who have promised a review on flat rates of pension tax relief, also came under fire when the IFS attacked proposals for clampdowns on tax avoidance.

The Conservatives plan to raise £4.6 billion through such measures, Labour £6.7 billion and the Liberal Democrats £9.7 billion.

‘None of the parties has proposed specific measures that would increase revenues by these sorts of amounts. One might think of these revenue targets as, at best, aspirational, yet the parties’ plans rely on achieving them.’

‘It is not helpful to the public debate to pretend that raising such sums is easy, certain or necessarily painless.’

Labour, Liberal Democrat and Scottish National Party plans to introduce a mansion tax were also condemned as ‘unnecessarily complicated.’

Cross-party support for the single-tier state pension was also questioned.

The IFS said it was ‘absurd’ that future state pension payments would depend both on price and earnings growth, and on whether previous years with high price growth were also years with high earnings growth.

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