If it was up 2 me

Category: Benefit in Kind

  • Reforming Pension Tax Relief for Fairness in the UK

    Reforming Pension Tax Relief for Fairness in the UK

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    A critical look at the current system and proposals for a more balanced approach

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    Tax credits offered on pension contributions are a cornerstone of retirement planning in the UK. The system is designed to incentivise individuals to set aside funds for their later years, with the added benefit of growing these savings in a tax-advantaged environment. While the principle is broadly applauded, the reality of how tax relief is distributed raises important questions of fairness, effectiveness, and sustainability. In this article, I explore the current structure, highlight what I see as its imbalances, and propose a series of reforms aimed at fostering a pension system that is fairer, simpler, and fit for purpose in the 21st century.

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    The Current System: How Tax Credits for Pensions Work

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    For the majority of savers, pension tax relief is granted ‘at source’—meaning that for every £80 a basic rate taxpayer contributes, the government adds £20 to make a total pension contribution of £100. Higher and additional rate taxpayers are entitled to claim back additional relief through their tax return: for a higher rate (40%) taxpayer, the total tax relief climbs to £40 per £100 contributed, and for additional rate payers, even higher.

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    This means that for someone who contributes £600 to their pension fund, and who pays tax at the basic rate (20%), the government tops up their pension by £150, resulting in a total contribution of £750. By contrast, a higher earner can claim a refund that takes their £600 contribution up to £1,000—a £400 uplift, representing 66.6% of their own money, compared to 25% for the basic-rate taxpayer. This reflects the fact that higher earners pay more tax, but also creates a significant disparity in the value of the government’s support.

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    A Question of Fairness

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    This disparity has long been a subject of debate. The current structure means that those who are already well-off receive the largest tax subsidies for saving—an outcome that may seem at odds with the goals of a progressive tax system. While it is true that higher earners contribute more in tax overall, the pension system arguably magnifies their advantage.

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    Consider that a higher-rate taxpayer could receive £400 in tax relief for every £600 they contribute, while a basic-rate taxpayer receives just £150 for the same contribution. Over a working lifetime, this difference is compounded, especially when combined with the power of investment growth and the ability of higher earners to contribute larger sums to their pensions.

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    The Annual Allowance and High Earners

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    Currently, there is a cap—known as the ‘annual allowance’—on the amount that can receive tax relief each year, set at £40,000. If someone were able to contribute the full £40,000, the basic rate tax relief would amount to £8,000, while a higher-rate taxpayer could claim up to £16,000 in relief.

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    Salary sacrifice schemes add further complexity. These arrangements allow both employer and employee to make pension contributions before tax and National Insurance is deducted, resulting in both parties saving on NI contributions. For example, if employer and employee contribute a combined £40,000 via salary sacrifice, there is no income tax, and the employer saves 15% in National Insurance, while the employee saves their own NI contributions. This mechanism, which is especially attractive for high earners, further widens the gap between those at the top and bottom of the earnings ladder in terms of government-supported savings.

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    The Power and Pitfalls of Compounding

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    One of the greatest advantages of starting pension savings early is the impact of compound returns. Money invested in a pension grows not just from the returns on the original investment, but also from reinvested gains over time. This means that the earlier someone starts saving, the larger their pot is likely to be in retirement—even without making larger contributions.

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    However, it is also true that for many people, earnings are lower earlier in their careers, and significant pension contributions become possible only as incomes rise. Thus, it is not merely the mechanics of tax relief, but the interaction between earnings, contributions, and compounding returns that shapes retirement outcomes.

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    Towards a Fairer System: Proposals for Reform

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    Given that pension tax relief is, in effect, a form of public expenditure—costing the Treasury billions each year—there must be reasonable limits. Otherwise, there is a risk that these generous incentives primarily serve those who need them least, while failing to promote adequate pension saving among those on lower or middle incomes.

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    Recognising the imbalances, I propose several reforms to the current system, with the twin aims of encouraging early and sustained pension saving while ensuring that the benefits of government support are more evenly distributed.

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    1. Flat-Rate Tax Relief

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    Rather than linking the rate of pension tax relief to an individual’s marginal income tax rate, I propose a flat rate of 25-30% for all taxpayers. This would mean everyone receives the same percentage uplift on their contributions, making the system simpler and fairer. Basic-rate taxpayers would receive a higher subsidy than they do today, while higher earners would see a reduction, but still benefit from a meaningful incentive to save.

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    • Example: At a 30% flat rate, a £1,000 contribution attracts £300 in tax relief, regardless of income.

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    2. Addressing Salary Sacrifice and Employer Contributions

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    The current system allows significant savings via salary sacrifice, especially for companies and high earners. To address this, I would introduce an employer National Insurance charge of 12.5% on all sums paid into a pension via salary sacrifice. Simultaneously, I propose reducing the general employer NI rate from 15% to 12.5%. This would help to neutralise the cost for employers overall while removing an unintended subsidy favouring the highest earners. This will help simplify the national insurance system and for those who employ lower earners, would encourage job creation.

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    3. Eliminating the £100k “Tax Trap”

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    Currently, individuals lose their tax-free personal allowance on income between £100,000 and £125,140, resulting in an effective marginal tax rate of 60%. I would remove this taper, restoring universal access to the personal allowance and ensuring that everyone is treated the same by the tax system, regardless of their income.

     

    4. Lifetime Cap on Tax-Privileged Pension Benefits

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    I suggest introducing a “lifetime tax relief allowance” for pensions, capped at £300,000 in today’s terms. Over a working life, this would allow an individual to receive up to £300,000 in government-funded tax relief, not an insignificant sum. This is based on a good target of a £1 million pension pot (30% of which would be tax relief), which is more than sufficient for a comfortable retirement for most people. Removing the current lifetime allowance on the pension pot itself would ensure that those who wish to save more can do so, but without further subsidy from the taxpayer.

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    5. Reforming Inheritance Rules for Pensions

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    I propose reinstating the ability to pass up to £1 million of pension wealth to one’s children free of inheritance tax, provided it is used to fund a pension for them. Any pension assets above this amount or not taken as a pension would be taxed at 20% upon death if not taken as a pension. This recognises the contribution of tax relief to the pension’s growth while ensuring a reasonable transfer of wealth.

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    6. Fairness for Families and Partners

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    Upon drawdown, I would allow pensioners to split their income with a spouse or long-term partner, recognising the reality that many partners (often women) take time out from the workforce to raise children or care for relatives, resulting in smaller pensions. The current system does not allow for easy redistribution of pension income within households, despite both partners often contributing equally to family finances.

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    Balancing Generosity with Sustainability

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    It is important to emphasise that pension tax relief is fundamentally a taxpayer-funded benefit. While incentivising pension savings is essential for both individuals and society, the system must not become a vehicle for the wealthy to accumulate disproportionate advantage at public expense. By setting clear and reasonable limits, applying relief at the same rate for everyone, and simplifying the rules, the system can be made more transparent and more inclusive.

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    Conclusion: A Balanced Policy for the Future

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    A reformed system, as outlined above, would preserve the incentive for all individuals to save for their retirement while reducing the disparities that currently favour higher earners. It would also recognise the shared responsibilities of employers, employees, and society as a whole in providing for old age, while ensuring the system remains affordable and sustainable in the long run.

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    In summary, my proposals would:

    • Introduce a flat, universal rate of pension tax relief (25–30%)
    • Remove the £100k tax trap
    • Cap lifetime tax relief at £300,000 per individual
    • Adjust employer National Insurance to prevent salary sacrifice loopholes, while lowering the overall rate
    • Allow fairer inheritance of pension wealth up to £1 million
    • Permit spouses and long-term partners to share pension income upon drawdown

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    These changes would create a pension system that is simpler, fairer, and more equitable—one that rewards early and consistent saving, supports families, and reflects the principles of a modern welfare state.

     

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  • UK Fuel Duty Revenue Decline: Impact of Electric Vehicles

    UK Fuel Duty Revenue Decline: Impact of Electric Vehicles

    Introduction

    Over the past five years, the UK Government has witnessed a significant reduction in fuel duty revenue together with a decline in car BIK (Benefit in kind) revenue.

    The loss over the last 5 years is circa 3 Bn per year for fuel duty alone.

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    This decline can be attributed to the increasing adoption of electric vehicles (EVs), which do not attract fuel duty. So the revenue from fuel duty is only going to decrease as more and more people shift to Electric Cars.

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    The Decline in Fuel Duty Revenue

    Fuel duty has historically been a significant source of revenue for the UK government. However, in recent years, this revenue has been on a steady decline. Fuel duties, which once contributed as much as 8% to the annual tax revenues, have now dropped to around 4% over the last four fiscal years .  it will decrease  further over the coming years.

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    The Rise of Electric Vehicles

    The adoption of electric vehicles in the UK has been growing rapidly. In 2023, the number of electric cars registered in the UK reached 455,200, a 23% increase from the previous year . By the end of June 2025, there were over 1.55 million fully electric cars on UK roads .

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    Whilst the government has started to address the shortfall, I do not think it is sufficient to fill the gap and is therefore adding more pressures on other taxes and  government expenditure.

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    Cost Comparison: Public Charging vs. Home Charging

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    There are 3 factors that affect the adoption of Electric Vehicles

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    Firstly, no road funds licence. Whilst the government has introduced a modest fee, this is not in my mind sufficient to offset the loss in revenue.

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    The second factor that is influencing the adoption of electric vehicles is the cost of charging. Charging an electric vehicle at home is generally more cost-effective than using public charging stations. The average cost of electricity in the UK is around 34p per kWh, (I pay 25p per Kwh) making home charging significantly cheaper. In contrast, public charging stations can cost around 50p per kWh for fast charging and up to 73p per kWh for ultra-rapid charging .

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    These figure are interesting when you compare to the wholesale electricity currently cost of  8.69p per Kwh. (according to Energy Stats UK). Assuming 70p per Kwh, at the charging point, 20% VAT 12p less 9p wholesale cost, this gives 49p to the supplier. However, at home at a charge of 25p per Kwh (what I am currently paying for electricity) and VAT at 5%  (1.25p per Kwh)  the supplier gets  14.75p per Kwh.

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    My conclusion is that, the supplier for a service station charges are getting  over triple that your domestic supplier is getting, which  does not make sense to me. I believe that the charges at the service station charges are charging a rate compatible with Petrol and Diesel costs, even though they are heavily taxed. The charger providers are making the equivalent to the fuel duty on the petrol and diesel that would otherwise go to the government. They are doing this because they can and people will pay as there is not enough competition due to lack of charging points.

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    I accept that there is a capital expense in installing a charging station, but no more so than a petrol station, so why should they make significantly more money.

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    Thirdly, the benefit in kind (BIK) for electric company cars is ridiculously low. Currently the BIK is now 3% which means someone with a  £40,000 company car in the 20% tax bracket would only pay £20 per month. That is one hell of a benefit and does not reflect the actual benefit. To lease an equivalent car would be over £300 per month. So it is no wonder 50% of company cars are now electric.

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    So What would I do

    • Have all cars subject to a minimum road tax of £195 as current level.
    • I would have a sliding scale for cars based upon their power.  It is the way they tax ICE (Internal Combustion Engines) cars so this should be applied to Electric Vehicles. In essence a car that can accelerate from 0-60 in under 4 seconds will use more electricity than a car that achieved it in 8 seconds. You can even buy a small Volvo SUV that can accelerate from 0-60 in 3.6 seconds. This is ridiculous. The sliding scale I would implement would be £100 per second under 8 seconds. Given the average mainstream EV acceleration is under 6 seconds, this would generate £2.2 bn to £3Bn
    • I would also adjust the BIK (benefit in Kind) for company electric cars. I would charge a BIK that is the equivalent tax of £100 for 20% tax payers and £200 for higher rate taxpayers. This would add at least ½ Bn to 1Bn in tax revenue.
    • I would add 20% charge for the equivalent of fuel duty. Whilst in theory, this would increase the cost by 20%, I believe by increased competition as more charging station appear, this cost will be absorbed into the overall cost. As I explained earlier, the current suppliers are making too much. I believe this would generate 0.25 Bn
    • I would have the equivalent of Ofgem, to monitor these costs and if necessary, implement a price cap. It works for our domestic supply so why not for Car charging.
    • The above would apply to all cars, EV or ICE and would rectify the decline in revenues from Fuel Duty etc due to electric Vehicle. However, I would make electric vehicles subject to 10% VAT and Hybrid subject to 15% VAT producing a £4000 saving on a  New £40k EV. How would this be paid for?  I expect this to pay for itself as it will encourage additional purchases of New EV’s, in significant higher numbers than before. I would go further and reduce UK made EV cars to 5% VAT to encourage investment in the UK.  I have, whenever possible bought (8 out of the last 9 cars) British Made cars and anything that encourages home grown products has to be a good thing.
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    Conclusion

    The reduction in fuel duty revenue, coupled with the rise of electric vehicles, presents a significant challenge for the UK government. While the transition to electric vehicles is essential for environmental sustainability, it also necessitates a re-evaluation of the tax system to ensure that government revenue remains stable.

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