Govt moves towards flat rate on pension tax relief

The Treasury has moved away from a radical move that would see pensions taxed like Isas in favour of the industry’s favoured flat rate of relief.

Chancellor George Osborne is believed to be designing a “hybrid” model with a flat rate set between 25 and 33 per cent, the Financial Times reports.

A consultation launched last year proposed alternatives to the model of pensions tax relief. It is widely agreed setting relief at the same rate as income tax unfairly favours higher and additional rate taxpayers.

The most radical shift was to a taxed-exempt-exempt system where contributions are taxed on the way in and tax-free when taken as income.

But the industry has repeatedly warned introducing the Tee model would be hideously complicated, particularly where it applies to defined benefit pensions.

A hybrid system would give a Government top-up but this would come after the post-tax contribution had been made and pension payments would still be taxed.

Setting the flat rate at 25 per cent is expected to save the Treasury £6bn a year.

Tax relief costs the Government around £50bn a year in lost income tax receipts and National Insurance contributions.