Charlie Weston: UK model on pension tax relief is the one to adopt
MOVES in the UK to restrict the amount of money that can be put into a pension to get tax relief should be replicated here.
Last week the British government announced that the tax relief on pensions will be limited to combined contributions of both the employee and the employer of £50,000 (€57,000) a year. This is down sharply from the current ceiling, which is five times that.
There had been suggestions that the limit would be nearer £30,000 a year, which would have hit many on relatively modest incomes who had many years of service with their employer.
Higher-rate taxpayers will also be allowed to keep tax relief at their highest rate on pension contributions up to the £50,000 limit. There had been fears that the British government would restrict tax relief to 20pc for everyone.
Taking the same approach here would be fairer rather than the current proposals to standardise at 33pc the tax relief rate for putting money into a pension -- something that will hit middle-earners hard.
Tom Clinch, managing director of Dublin-based financial advisory company KSi Clinch, said the proposals in this country to reduce from 41pc to 33pc the tax relief a higher-rate taxpayer could claim were "unworkable and unfair". He said it would particularly hit the self-employed.
But it would not affect employer contributions, thus leaving senior bankers and civil servants unaffected.
Mr Clinch hit the nail on the head. What is constantly forgotten is that the only way to make any savings out of changes to the tax relief is to tax the employer element of pension contributions.
Merely standardising the tax relief rate at 33pc will save just €115m a year, according to a Dail answer given by Minister for Finance Brian Lenihan.
To get savings of €700m or even €1bn would require taxing the employer contribution level as a benefit in kind at a rate of 41pc.
What most commentators appear to miss is that public servants, politicians and fat-cat bankers, where large payments are made into their pensions by their employers, would end up having to pay vastly more to fund their generous retirement packages.
The UK has gone for a fairer and simpler system. We should do the same instead of punishing middle-income earners in the private sector whose pensions funds are shot and who are already bearing an unfair burden of the State's financial collapse.