Pensions tax relief left alone as Osborne resists temptation to save £12bn

1st December 2011

It was feared that George Osborne would cut the higher rate tax relief on pensions today which would have released about £12billiion a year but thankfully he resisted!

This should be a relief to those contributing into pension schemes and getting up to 50% tax back depending on income bracket.

It was a welcome sign that the Government is committed to encouraging saving as Britain heads towards an almighty pensions crunch thanks to chronic under-saving.

Tax-relief is seen by many financial advisers as the only worthy reason a saver would choose a pension scheme over a tax-free Isa.

The Treasury pays out around £30billion in total tax relief each year. The Government automatically adds basic rate tax into a pension fund when someone makes a contribution. It means savers only need to contribute £80 for £100 to go into their pot.

Higher rate, taxpayers can claim back the remaining 20 per cent or (or 30 per cent if they earn over £150,000 and are additional rate taxpayers) via their tax return.

Pension investments then get a chance to grow predominantly tax-free until retirement. When savers draw on their pensions – via an annuity or income drawdown policy – they pay tax at their highest income tax rates.

Because most people’s incomes drop in retirement many higher rate taxpayers expect to pay basic rate in retirement.

The removal of the tax relief would have made saving into pension schemes much less attractive so the retention of the tax relief should encourage people to make the most of and maximise their pension contributions.

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