Treasury could target 3m pension savers to plug budget hole

The Government could withdraw tax relief for more than 3 million pensions savers to plug its budget black hole, Skandia says.

With public borrowing expected to increase by more than £500bn over the next five years, Skandia believes higher rate tax relief on pensions could be a prime target to raise extra revenue.

From 2011, higher rate tax relief on pension contributions will be withdrawn for those earning £150,000 or more each year.

However, the measure is only likely to raise around £3.1bn, a relatively minor sum for the Treasury.

Skandia says far more significant revenues would be generated by removing higher rate tax relief for all 3.3m high rate taxpayers.

In the past, significant tax reliefs, including mortgage interest relief and the married couples allowance, have only been available to basic rate taxpayers, and this could provide the precedent needed to remove pension tax relief.

Colin Jelley, head of tax and financial planning at Skandia, says: "Pensions currently offer significant tax benefits and history has demonstrated that when Governments have to raise revenue, reducing or abolishing tax reliefs is an often used ‘stealth' option when compared to introducing tax rises.

"Given the current Government's move to reduce pension tax relief in the Budget, it is not beyond the realms of possibility that they could extend this to all higher rate tax payers."

Jelley says higher rate tax payers should consider bulking-up their pensions now, to protect themselves in case their valuable tax relief is withdrawn in the future.