Flat rate of pensions tax relief recommended by RSA

18 April 2018

The Royal Society of Arts (RSA), has recommended that the government should commission an independent review of tax relief in the UK, with a brief to explore if and how a flat rate ‘tax bonus’ could be established. The RSA estimate that 40 percent of total tax relief expenditure flows to the top 10 percent of earners.

The report ‘Venturing to Retire - Boosting the long-term savings and retirement security of the self-employed’ recommends that the government should appoint an independent expert in pensions and taxation to conduct a review into the future of tax relief. This would examine the extent to which a flat rate system would boost the retirement security of workers – including the self-employed – and consider how such a system could be realised in practice while retaining broad public support.

The report does state that:

                            "the journey towards a flat rate tax relief would not be simple"

 

Defined Benefit (DB) pensions, in particular, could jar with such a model, in part because they operate on ‘net pay’ arrangements were offering tax relief at anything other than the marginal tax rate is difficult. Yet hurdles such as these are not insurmountable, the report claims. As for the financial implications, it is estimated that a 30 percent tax bonus would cost the Treasury broadly the same as the current system and if it were to require extra funding (eg if it led to considerably higher pension contributions), savings could be made by making modest changes elsewhere, such as by reducing the annual allowance threshold.

The report says that this ambitious reform of tax relief would significantly boost government support for low and middle-income savers. As it stands, tax relief is provided at a person’s marginal income tax rate, meaning a basic rate taxpayer gains 20 percent tax relief while a higher rate taxpayer enjoys 40 percent tax relief. This system is regressive, the report says, and if we accept that income tax is progressive, then relief at marginal tax rates must be the opposite.

According to new RSA modelling, only 30 percent of government spending on tax relief goes to basic rate taxpayers, despite them making half of all pension contributions. The RSA estimate that 40 percent of total tax relief expenditure flows to the top 10 percent of earners.

Other recommendations in the report include that the government should:

• Clear up the confusion surrounding the Lifetime ISA by restating its purpose and value
• Reconsider its opposition to auto-enrolment for the self-employed, and follow through with a proposal to view accountancy software providers as the ‘employer’
• Explore options for a Pensions Passport system that would enable the self-employed to carry over a pension from previous employment
• Pilot an auto-escalation scheme to boost saving rates among the self-employed
• Create a roadmap for turning the Pensions Dashboard into a comprehensive Money Dashboard
• Task the new single financial guidance body with offering both guidance and advice on pensions
• Consider launching sidecar products that combine short-term savings account with a long-term pensions account
• Extend eligibility of the Lifetime ISA to older savers, beginning by moving the age threshold from 40 to 50
• Present the self-employed with an IP insurance policy option when they complete their self-assessment tax return
• Introduce auto protection rules that default savers onto a drawdown scheme during retirement

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