Ministers are drawing up plans to raid the pension contributions of higher earners to help pay towards lifting everyone earning under £10,000 out of tax.
Workers currently receive tax relief on the money they pay into their pensions, up to a maximum of £50,000. But under controversial plans being discussed by the “quad” at the heart of the coalition – David Cameron, the prime minister, Nick Clegg, his deputy, George Osborne, the chancellor, and Danny Alexander, the Treasury chief secretary – this upper limit would be reduced, with potential savings of billions of pounds.
For higher earners, the move will feel like a tax rise: those paying the top rate of 50 per cent can claim relief of up to 50 per cent on their pension contributions, meaning that for every £1 they put into their pension pots, the government tops it up with an extra 50p.
One person close to Mr Osborne said: “This is being looked at, it is definitely a good way to be able to raise money to get towards the £10,000 tax rate.”
The “quad” was expected to discuss the proposal on Monday night as they thrash out the details of the March Budget. One aide to the chancellor said he was interested in the idea, but it could prove costly for his Conservative party, whose core voters are likely to be in the group most affected by the change.
Gavin Kelly, chief executive of Resolution Foundation, a think-tank, said: “If the Treasury is looking for serious cash to give some much needed help to those on low-to-middle incomes it is no surprise that they are considering a further reduction in the level of the annual limit, which could generate a lot of money.”
“It will obviously be highly controversial with many in the Conservative party as it will hit high earners, and it will also face opposition from some in Whitehall – so they will have to hold their nerve in the weeks ahead.”
The Liberal Democrats have long campaigned to claw back some of the money given back to higher rate pension savers.
Danny Alexander told the Daily Telegraph last week: “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.”
The party’s preferred option is to reduce tax relief on contributions to the basic income tax rate of
20 per cent, a measure included in their last election manifesto.
But the Conservatives are not keen on that option, warning it would affect anyone earning more than £40,000 – voters in the key electoral battleground known as the “squeezed middle”.
However, lowering the overall annual cap, which the coalition has done once before, when ministers reduced it from £250,000 to £50,000, is seen as a more effective compromise. It would also help fund Nick Clegg’s stated aim of raising the income tax threshold to £10,000. Doing so by 2015 will cost about £4bn, and if done by 2014 would cost £5.5bn, none of which has yet been budgeted for.
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