The spectre of wholesale change raises its head again in the Liberal Democrat manifesto. Reforms over recent years, such as multiple reductions in the annual and lifetime allowances for tax-free saving, have reduced the cost of tax relief overall. However, some favour the more radical approach of a single rate of tax relief applied to all pension contributions which, it is argued, would spread the advantages of tax relieved saving more evenly. A tax relief rate of 30 per cent, for example, has been calculated by those who argue in its favour to have a similar cost to the Treasury as the current system. It is claimed that a universal rate could offer a larger incentive to basic rate taxpayers to save.
Nevertheless, the implementation of a single rate of tax relief would be far from straightforward, and would require widespread changes in pension scheme administration. The resulting tax regime could be complex and it is possible that yet more change in the pensions sphere could discourage potential pension savers, at a time when auto-enrolment has engaged a large number of people who previously had no pension savings. However, this could be balanced by current basic rate taxpayers enjoying higher rates of saving.
The idea of a flat rate of relief keeps re-appearing and it is quite possible that it may be implemented at some point in the future, whichever party is elected to Government. Those currently paying tax at the higher and additional rates should bear this in mind when deciding how much to direct into their pension savings in the near future.
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View the Liberal Democrat Manifesto.