Guy Opperman said we are going to see a ‘great deal more intervention’ by the Chancellor on pensions
A flat rate of 30 per cent tax relief on pension contributions is “inevitable” in the next three to four years, a former pensions minister has said.
Guy Opperman, who served in the role between 2017 and 2022, said we are going to see a “great deal more intervention” by the Chancellor in tax on pensions.
A recurring theme in recent months has been calls to review how pension tax relief is granted.
A flat rate of 30 per cent tax relief would see those earning £50,270 or more pay an effective 10 per cent tax charge on their pension contributions, though it would benefit those who earn below this amount.
It comes as the total net cost of pension tax and national insurance contributions (NICs) relief hit £48.7bn in 2022/23, up slightly from £47.6bn a year earlier, according to the latest figures published by HMRC.
When asked if we need a flat tax rate of 30 per cent for everyone in the UK to encourage savings, Opperman, who joined a fintech company in 2024, said he thinks it could be a good option.
Speaking at the Professional Pensions Live conference on Wednesday, he said: “In my view, it’s inevitable, because if you are Rachel [Reeves] and you are in a fiscal hole, you look for taxes that you can either raise – and that’s difficult, they don’t like doing that at the moment because they back themselves into a corner – or tax breaks you can take away.
“And there are an awful lot of tax breaks to middle-class pensioners with private pensions, that if you’re the Chancellor, you’re thinking, ‘Do you know, I could take some of those away?”
And he thinks action should be taken quickly, adding: “So, my view is, all those who are seeking better outcomes on tax and pensions, I think good luck with that. It’s the best description.
“I think it is inevitable in the next three to four years, my view is sooner rather than later.”
How does pension tax relief currently work?
Every time you pay into your pension, that money is exempt from tax. So, if you are a basic rate taxpayer, adding £100 into your pot means you no longer owe the 20 per cent basic rate income tax on that £100.
The Government then refunds this tax into your pension pot as a tax bonus. So, using the £100 example, you will get £25 extra in your pot.
This is because you have already paid tax on the £100 you added to your pension. If you had not, your £100 would have been £125 – that is because £125 taxed at 20 per cent is £100.
Higher and additional rate taxpayers benefit from even more tax relief when they contribute.
The higher rate is 40 per cent on earnings above £50,270. That means your pension contributions are about to get 40 per cent back in tax relief.
You will get the first 20 per cent added to your pot automatically. The remaining 20 per cent you will need to actively claim back from HMRC via a self-assessment tax return.
For additional rate taxpayers, you will enjoy 45 per cent tax relief on each contribution. £55 of your money means £100 in your pension – a tax bonus of over 80 per cent.
How would a flat 30 per cent rate work?
Under a proposed flat rate system, everyone would receive tax relief at the same rate, according to AJ Bell. For example, the Government could set this flat rate at 30 per cent – or 25 per cent.
Setting a flat rate above the current 20 per cent basic rate would benefit lower earners who are increasing the amounts they receive into their pensions at the expense of higher earners who would have higher tax bills to pay.
It would mean higher rate payers will pay an effective 10 per cent tax charge on their pension.
The simple way to achieve this would be to prevent individuals from claiming additional tax relief through their tax return, the financial services company said.
Instead, they would just receive the standard flat rate relief directly credited into their pension.
But this view overlooks the fact that the largest expense associated with tax relief on pension contributions is not driven by member contributions to schemes, but rather by employer contributions to defined contribution (DC) schemes and the value of the tax relief on accruals in defined benefit (DB) schemes.
What do the experts think?
Sir Steve Webb, former pensions minister and partner at LCP, said: “There would be huge political opposition as millions of higher rate taxpayers saw large cash losses whilst the gains to basic rate taxpayers would be spread more thinly and would simply be ‘banked’ and not generate much political upside.
“A revenue-neutral flat rate would probably fall short of the 30 per cent figure, creating even larger losses for higher earners and smaller gains for the majority.
“If a new Government were planning to make such a radical change it would almost certainly do so right at the start of a new Parliament to give time for the years of legislation, consultation and implementation that would be required.
“The fact that the Labour Government did nothing in its first Budget makes it exceptionally unlikely that this idea will be back on the table any time soon.”
Rachel Vahey, head of public policy at AJ Bell, said the idea of a flat rate of tax is “as old as the hills” but it never makes it past the drawing board.
She told The i Paper: “A pensions tax relief raid would not work in practice.
“The most obvious problem both practically and politically would be net pay pension arrangements, including defined benefit (DB) schemes, the vast majority of which are public sector schemes.”
If a flat rate of 30 per cent pension tax relief was applied to these schemes, then the only way to make sure the correct level of tax relief was applied to contributions from higher and additional-rate taxpayers would be to hit those members with a tax charge likely running into thousands of pounds, she explained.
She added: “This would be a move guaranteed to annoy public sector workers, many of whom are still battling with annual allowance charges on their pension contributions. No doubt these workers would soon enough loudly make their objections known.”
Craig Rickman, personal finance expert at interactive investor, said allowing savers to claim pension upfront tax at their marginal rate is expensive for the Government.
If they did go ahead with these proposals, Mr Rickman said it would represent “further meddling to the pension tax system” when greater consistency is desperately needed.
He added: “Constantly fiddling and tweaking with the tax rules can make things rather messy, which might disincentive retirement savers at a time when what we really need is more engagement.”
The Treasury has been contacted for comment.
