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George Osborne drops plans to cut tax relief on pensions

The chancellor, George Osborne, has decided against plans to end or alter tax relief on pension contributions. George Osborne

The proposed scheme that George Osborne has now dropped would have scrapped upfront relief, worth an estimated £21bn to savers, but made pension pot withdrawals tax free.

The alternative option was to set a flat rate tax-relief, which could have been unpopular with higher earners.

However, campaigners said that George Osborne has “missed a huge opportunity” to tackle inequality within pensions and also help the lower paid.

Others have said that he was right to protect existing reliefs, and that if he had imposed radical reforms it would have created new risks and new administrative burdens for employers.

With the current system, pension savers receive tax relief at the same rate as their income tax. This means that basic rate tax payers receive relief at 20% and higher rate tax payers at 40 or 45%.

The proposed changes introduced arrangements similar to an Isa, with no tax relief on contributions, but with withdrawals being tax free. This proposal would have given a significant short-term boost to the government, but at the expense of lower tax revenue later.

An alternative option which was considered by the treasury was for flat rate relief. This would have benefited basic rate tax payers, but cut reliefs for higher earners.

BBC business correspondent Joe Lynam

‘So a policy which hadn’t been announced will now not be announced.’

How pension tax relief works

Pension savers pay no tax on money they put into a pension, but pay tax on the money that they take out each year above the personal allowance.

The government also allows pensioners to withdraw 25% of their pot as a lump sum, tax free.

The pension scheme works in a way which allows some of your earnings which would have been taken by the government as tax, to be contributed to your pension instead.

Pension savers receive tax relief at the highest rate of income tax they pay. This means to a pension contribution of £10,000 would in effect be £8,000 for a basic rate taxpayer, as the £2,000 would have gone in tax. For a higher rate taxpayer, this means that a £10,000 contribution would effectively be £6,000, meaning this system is more beneficial for higher rate tax payers.

The amount anyone can save into a pension and receive tax relief on is £40,000 per annum or £1.25m in their lifetime.

This decision ensures that pension planning continues to provide a very tax efficient means of saving for individuals and companies alike. Aside from saving for retirement a pension can also form part of an inheritance tax planning strategy.  Here at Ad Valorem Wealth Creation we are constantly working with our clients to assist them with effective tax planning strategies.  If you would like to know more about how we can assist you and your business please contact me at this office.

Terry Lawson DipCII,

Partner, Ad Valorem Wealth Creation LLP


t: 01908 219100

m: 07714 844783


For more information please click here, to view BBC’s ‘Pensions: George Osborne drops plans to cut tax relief’

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Posted in: Blog, Pensions, Tax, Uncategorized