Steve Webb, Pensions minister.
Steve Webb, pensions minister

A government minister has called for pensions tax relief for higher earners to be scrapped and replaced with a single 33 per cent rate to boost savings among lower earners.

On Wednesday Steve Webb, pensions minister, said that abolishing relief for those who pay tax at higher rates of 40 and 45 per cent, and bringing in a single flat rate, should be a key reform for the next parliament.

The Centre for Policy Studies, a free market think-tank, has estimated that the bill for encouraging retirement savings was as high as £54bn in 2012-13.

However, while basic rate taxpayers make 50 per cent of total pension contributions, they benefit from only 25 per cent of pensions tax relief, according to the Pensions Policy Institute, an independent think-tank.

Speaking in a personal capacity at an event in London, Mr Webb, a Liberal Democrat MP, said he did not believe that the current system of tax relief incentivised pension saving “other than for the very rich”.

He added: “It is hard to understand why we do it the way we do it; 33 per cent might have an impact.”

The 33 per cent rate is higher than the level previously floated by Mr Webb, and more than a 30 per cent figure that the PPI has suggested would leave government revenue unchanged despite the cost of raising basic rate relief from 20 per cent.

However, Mr Webb suggested that a 33 per cent rate for relief might also be tax neutral if it discouraged the use of “salary sacrifice” arrangements used by employers and employees to make tax savings on pensions contributions.

He also repeated a promise to scrap the “lifetime allowance”, which currently limits tax relief on savings to £1.25m.

“As a Liberal, lifetime allowances don’t work for me because what they say is simply that if you save beyond this level, or your investments grow beyond this level — we will penalise you,” said Mr Webb.

Mr Webb’s views are not official Liberal Democrat policy. The party pledged to establish a review in the next parliament to consider the case for a single rate tax relief between the current 20 per cent basic rate and 40 per cent.

However, observers say that pensions tax relief is likely be targeted if there is a change of government in May.

“The vast majority of pensions tax relief is paid to higher income earners and in an age of austerity a lot of politicians find this unjustifiable,” said Mark Twigg, a former government adviser and executive director at Cicero, a corporate communications agency.

“There is a sense within the Labour party that there might be more effective ways for getting tax relief to people on lower incomes, who actually need the incentives to save.

“A Conservative majority government is unlikely to preside over the scrapping of higher rate tax relief.”

Michael Johnson, a fellow at the Centre for Policy Studies, said a 33 per cent rate for pensions tax relief “seemed like a victory for common sense and social justice”.

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