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IFS proposes pensions tax reforms

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In a new report A blueprint for a better tax treatment of pensions, the Institute for Fiscal Studies puts forward a long-term vision for pensions tax reform, ‘reducing subsidies where they are overly generous and increasing them where saving incentives are weaker’. In essence, the proposals would focus tax relief and other support on those with lower income, and also remove complexities associated with the current annual and lifetime allowances.

Key proposals include:

  • Capping the 25% tax-free lump-sump allowance to the first £400,000 of the pension fund, eventually replacing the tax-free component with a subsidy which would provide support not only to the majority of taxpayers but also, crucially, non-taxpayers.
  • Introducing relief from primary NICs on employee pension contributions, but subjecting pension income to primary NICs, aligning the tax and NICs treatment on employee contributions. The IFS notes that this would benefit those on low and middle incomes at the expense of higher earners with large employer pension contributions, particularly if employer contributions were made subject to secondary NICs.
  • Applying secondary NICs to employer pension contributions, accompanied by a new subsidy which would provide relief for all businesses. The subsidy could provide complete relief at 13.8%, or a lower rate could be introduced to provide relief for businesses but also raise revenue for the exchequer.
  • Reforming the lifetime allowance and ending tapering of the annual allowance, removing complexity and avoiding problems associated with the taper.

Isaac Delestre, a research economist at IFS and an author of the report, said: ‘Our system of pensions taxation has too many features that are arbitrary, wasteful or unfair. It’s long past time we retired them.’

Issue: 1606
Categories: News
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