February 21, 2012 12:32 pm

Laws joins call to cut pension tax relief

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David Laws, the former chief secretary to the Treasury, has backed calls to raise the income tax threshold to £10,000 in March’s Budget by cutting pension tax relief for high earners.

There is a debate in government about whether to raid the pension contributions of the higher paid by halving the pension tax relief awarded to those over a certain salary threshold. But as the Financial Times has reported, ministers are instead considering lowering the limit on an individual’s annual tax-free pension pot, currently set at £50,000.

Speaking on Newsnight late on Monday, Mr Laws – one of Nick Clegg’s closest political allies who resigned from his Treasury post over a breach of rules on expenses – suggested this was the most likely option.

“In the past, virtually all of the tax relief has gone to the very most affluent people in society,” Mr Laws said. “I suspect that what the government will look at is … [whether] we can make changes that take away some of the subsidies that are going to the top 1 per cent or 5 per cent of the income distribution and get them to where they’re really needed.”

“What we’ve been doing as a nation is subsidising the most affluent people when actually you’d think we’d be subsidising people on lower incomes,” Mr Laws added.

The Liberal Democrats have long campaigned to retrieve some of the money given back to higher rate pension savers with the aim of reducing pressure on lower earners. Danny Alexander, the current chief secretary to the Treasury who replaced Mr Laws after he stepped down, told the Daily Telegraph earlier this month: “If you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate.”

It is now clear that following the departure of Mr Clegg’s economic adviser, Chris Saunders, Mr Laws is providing ever stronger policy steers within the party. There has been continuing speculation that he may return to a government post later this year.

In his Newsnight interview, Mr Laws said he believed the wider Lib Dem aim of raising income tax thresholds would help end the household austerity that has blighted the economy.

“Now that we’re seeing inflation this year on a firm downward track, that gives us the opportunity ... of ending the austerity on households budgets,” he told the BBC.

“That would make a big difference to the economy and obviously to millions of people who have been through one of the toughest periods in terms of household budgets in living memory,” he added.

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