Flat-rate on Pension Tax Relief "back on the table" in "tax grab on middle earners"

A FLAT-rate of Pension Tax Relief could be back on the table to help plug the government's financial black hole but it would be a “tax grab on middle earners”, experts claim.

After blowing up two rounds of £10 billion in fiscal headroom, the UK Government now faces an estimated £15 billion fiscal hole – and the options to plug the gap are narrowing.

One proposal, first floated in a 2015 HM Treasury consultation, may be back on the table: the introduction of a flat rate of pension tax relief, potentially set at 30% for all savers.

The concept has been rumoured in previous Budgets but shelved each time, given the political sensitivity and scale of overhaul required. 

However, with public finances under increasing strain, this measure may now be seen as too tempting to ignore, experts claim.

Anita Wright, Chartered Financial Planner at Anita Wright, said that while it would be welcome for low earners, it would act as a “stealth tax” on high earners.

She said: "Introducing a flat rate of 30% pension tax relief would represent a significant shift in the structure of UK pension incentives. For basic-rate taxpayers, it would offer a more generous uplift from 20% to 30%, potentially encouraging greater contributions and improving pension adequacy among lower earners. 

"Whereas for higher- and additional-rate taxpayers, it would amount to a material reduction in the value of their current tax relief (from 40% or 45% down to 30%). In practice, this would act as a stealth tax on higher earners — a politically safer and a sneakier way to increase tax revenue from those already contributing disproportionately to the Exchequer, without explicitly raising income tax rates. 

“That said, even at 30%, pension contributions may remain preferable to high-risk vehicles such as a VCT or EIS. With spending cuts politically toxic, tax rises limited by manifesto promise and a wealth tax seemingly off the table, this reform presents itself as a low-hanging fruit.”

Ross Lacey, Director & Independent Financial Adviser at Fairview Financial Management, agreed, adding: "This would be a positive for basic-rate taxpayers as they'd get more than they currently do added to their pensions through tax relief. However, it would create less of an incentive to save into pensions for higher-rate and additional-rate tax payers. 

“The logistics of this also need to be considered; particularly for many who receive their pension contributions through salary sacrifice where the contributions are paid by their employer from their gross salary so tax relief is effectively automatic.

Samuel Mather-Holgate, Independent Financial Adviser at Mather and Murray Financial, believes even more pension reform is on the cards.

He said: "Tax relief on pension contributions has always been an anomaly where those who earn the most get significantly better tax breaks than those on modest incomes. 

“A flat rate of tax relief would not only create greater fairness in the system but also claw back some head room for the Chancellor. If she goes for this, I would expect to see other criteria changed at the same time to create a mega pension reform day where allowances and access may also be on the table.”

Kundan Bhaduri, Entrepreneur at The Kushman Group, believes the move would penalise savers.

He said: "If the Treasury does push through a flat 30% pension tax relief, it would mark one of the most significant savings shake-ups since auto-enrolment. On paper, it creates a more ‘equitable’ system. In practice however, it is wealth redistribution with a glossy tax-reform label. 

"For higher- and additional-rate taxpayers, it is effectively a quiet tax grab dressed up as fairness. Reducing the 40%-45% tax incentive to 30% undermines the reward for financial prudence and long-term planning. We talk endlessly about encouraging self-sufficiency in retirement, yet here we are, debating whether to punish those who actually take that advice. 

“Will it deter savings? Not necessarily. But it certainly dilutes the appeal, particularly for those most likely to save enough to avoid burdening the state later. Short-term Treasury gain will come at long-term social cost. Labour should tread carefully before tampering with the few policies that still reward delayed gratification over instant consumption.”

Scott Gallacher, Director at Rowley Turton, added: "A flat rate of 30% pension tax relief would be billed as fairer, but in reality, it risks being yet another tax raid on middle earners. With fiscal drag pulling more people into higher tax bands, many so-called ‘higher-rate taxpayers’ aren’t particularly high earners anymore. It would be almost impossible to implement cleanly. 

"Employer contributions, especially for limited company directors, would be an obvious workaround and might create new loopholes. It would also likely favour defined benefit schemes—mainly public sector—and I can’t see the government taxing doctors, senior police officers or head teachers, leaving private sector savers to bear the brunt. 

“It could also breach Labour’s pledge of no tax rises on working people, as pensions are deferred pay. Such a move risks denting confidence in retirement saving when we need people saving more, not less.”