Lib Dems put pension tax breaks for the richest under scrutiny again

Liberal Democrat pressure in the coalition government has already secured significant reductions in the tax breaks for the very richest. However, these tax breaks are still sufficiently generous that there is the scope for raising plenty more money without introducing punitive tax rates.

For example, restricting the tax relief on pension contributions to 20% (the standard rate for most people) rather than the current 40% for those earning over £100,000 would raise over £3.5 billion more each year. Last year, in a clear sign of the way in which senior Liberal Democrats are thinking, David Laws asked a series of Parliamentary questions fleshing out the details of what would be raised by different moves.

So it is no surprise that Danny Alexander has returned to the theme in the Daily Telegraph:

Danny Alexander, a Liberal Democrat Cabinet minister, says the better-off are receiving overly-generous tax relief when they invest money for their retirement.

Mr Alexander’s proposals would see tax relief halve from 40 per cent to 20 per cent. He also wants workers on the minimum wage, who earn up to £12,500 a year, to pay no income tax at all.

Mr Alexander claims that removing the higher-rate tax relief would save the Exchequer more than £7 billion and make the system fairer. Even restricted to those earning more than £100,000 the Treasury could save £3.6 billion.

“If you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate,” Mr Alexander told The Daily Telegraph.

His remarks may open up a new dispute between the Tories and Lib Dems over tax. They are already at odds over Lib Dem calls to keep the 50p top rate of tax and introduce a “mansion tax” on high-value homes. George Osborne, the Chancellor, is expected to strongly resist any calls to scrap higher-rate tax relief.

Arguing for cutting pension tax breaks for the richest in order to fund income tax cuts for millions is both sensible economics and smart politics. Sensible economics – because the net effect does not undermine the struggle to cut the deficit and in fact is likely to cause an economic boost with the extra spending caused by the income tax cut greater than the reduction in spending caused by the tax rise. Sensible politics – because once again it puts the Liberal Democrats on the side of tax cuts for the millions whilst the Tories are on the side of the very richest.