By Brian Milligan Personal Finance reporter
A new system of flat-rate tax relief on pension contributions would be fairer to everyone, especially the low-paid, the insurance industry has said.
The Association of British Insurers (ABI) is asking the chancellor to introduce a Savers’ Bonus, which would treat all taxpayers equally.
At the moment people on higher incomes benefit from either 40% or 45% tax relief, while others only receive 20%.
The ABI said a flat rate would provide a “massive boost” for ordinary workers.
But other sections of the pensions industry disagree, arguing that a single rate would be of little benefit to any savers.
Chancellor George Osborne is due to announce changes in his budget on 16 March, following a seven-month inquiry by the Treasury.
The ABI said that basic rate taxpayers – the majority of the UK population – currently receive only 30% of the money that the government spends on tax relief.
If there was a flat-rate, they could get almost half that sum, making the system much fairer.
Such a change would also encourage low and middle-income earners to save more. At the moment, such workers are not saving enough for retirement.
“The Savers’ Bonus would provide a massive boost to the average worker’s savings,” said Yvonne Braun, the ABI’s director of long-term savings policy.
“A single rate of tax relief would be simpler, fairer and more sustainable for all savers.”
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But others argue there would be little benefit to a flat rate.
The Pensions and Lifetime Savings Association – previously the National Association of Pension Funds – said any flat rate was likely to be set at 25% or lower.
It said that would produce little benefit to basic-rate taxpayers, but would “greatly reduce” the attractiveness of pension saving for 4.6m higher rate taxpayers.
Basic rate tax-payers making a £10,000 pension contribution would gain £500 if the flat rate was set at 25%.
But those on the higher, 40%, rate would lose £1,500.
One other advantage of a flat-rate is that it could save the Treasury up to £6bn a year if set at 25%, according to the Pensions Policy Institute.
Earlier this week the Treasury Minister David Gauke told the BBC that any changes would need to be effective for encouraging saving.
Higher rate taxpayers wanting to save money are being advised to make extra contributions before 16 March.
Those on the basic rate are being urged to wait until then, as it could be to their benefit.