FINANCIAL planners and wealth managers have responded to pension expert, John Ralfe, calling for the government to scrap higher-rate pension tax relief and replace it with a flat rate of 30% for all taxpayers.
One said it “could seriously damage long-term saving confidence”, while another warned “this could massively backfire on the government”.
The call for a flat rate comes as Labour’s newly launched Pensions Commission begins its work on long-term retirement reform amid concerns over a growing pension savings crisis.
While supporters view a flat-rate as fairer and more fiscally sound, others warn it could damage confidence in pension saving and lead to unintended consequences, including a shift to employer contributions or salary sacrifice to retain higher relief.
Scott Gallacher, Director at Rowley Turton commented: “A flat-rate pension tax relief may sound fair, but it risks further complicating the pensions system. It also comes with a host of unintended consequences. Owner-directors and senior staff could easily sidestep the change by using employer contributions or salary sacrifice, effectively retaining 40% tax relief.
“Meanwhile, Defined Benefit scheme members could face unexpected tax charges simply due to how their pension inputs are calculated — potentially repeating the government’s previous mistake with NHS consultants, where flawed rules led to reduced hours and early retirements.
“The government, desperate to at least try to balance the books, may see this as a quick political win, and Rachel Reeves might find the optics appealing. But undermining pensions could seriously damage long-term saving confidence. For higher-rate taxpayers, this may be a ‘use it or lose it’ moment — now could be the time to maximise contributions while 40% relief is still available.”
Ross Lacey, Director at Fairview Financial Management, said the move could backfire: “The whole point of tax relief is to get back the tax that’s already been paid. Under a flat rate system, there would be those getting tax back above and beyond what was paid by them in the first place. This could massively backfire on the government if people wise up to this opportunity.
“A basic rate taxpayer putting £10,000 into a pension would currently receive tax relief added of £2,500. This is on the basis that they would have previously earnt £12,500 and paid 20% tax, i.e. £2500. Under the proposed flat rate, that same £10,000 would attract £3000. Great for the pension saver, but where does the extra £500 come from?”
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said the move would constitute a stealth tax, but may be seen by the Government as “low-hanging fruit”: “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 promises and a wealth tax seemingly off the table, this reform is a low-hanging fruit.”
Riz Malik, Director at R3 Wealth, is worried scrapping higher-rate pension tax relief could see more wealth creators head overseas: “Many higher-rate taxpayers are already disillusioned with the UK tax system. Making it less attractive risks pushing more people to explore overseas options and we are already seeing this.”
Samuel Mather-Holgate, Independent Financial Adviser at Mather and Murray Financial, added: “For years, Chancellors have toyed with the idea of making this change and, now that we have a Labour government, the certainty has been cemented but the timing not. The only thing stopping Reeves making this change is the administration of it. At present, pay more into your pension from your salary and the tax relief is neatly taken care of.
“If she wants to change it to a more favourable rate for basic rate savers and less so for higher rates, will everyone suddenly have to do a tax return? Our complex tax system is once again the tail wagging to dog. To rip up the plethora of tax rules and start again would be a project no one would envy but one that has the potential to revolutionise Britain.”
Photo by Alexander Grey on Unsplash
