Simplification is the key - Centre for Policy Studies

Introduce a Junior ISA
The ISA should be extended to the under-16s, perhaps branded as a “Junior ISA”, with
an annual savings allowance of £1,200 (equivalent to £100 per month). Introduction of
the Junior ISA would complete the association of the ISA brand with lifetime saving. 7
Opportunities to reduce the deficit
Simplification could be accompanied by an opportunity to save the Treasury
considerable amounts of money without risking a sharp reduction in long-term
saving; a rare example of a policy “win-win”. In 2008-09 nearly £30 billion was spent
in upfront tax relief, but the effectiveness of at least some of this spend is
questionable, pension saving having become so unattractive, particularly for standard
rate taxpayers. Indeed, upfront fiscal incentives have little impact on many people’s
propensity to save; flexibility, including immediate access to savings, is their key
influencer (after the availability of cash).
This paper compares the cost to the Treasury of a variety of alternative tax relief
structures, 8 based upon the actual 2008-09 outturn 9 (in £ billion), i.e. before the
changes to tax relief introduced in the 2009 and March 2010 Budgets. These are
expected to produce a net yield of £3.5 billion per year from 2012-13. 10
Tax relief on Pensions Net cost Saving
Contributions NICs* Accruals in payment to Treasury vs. actual
Actual cost (EET) £21.7 £8.2 £6.7 -£9.5 £27.1 -
TEE £0.0 £8.2 £6.7 £0.0 £14.9 £12.2
E 20% ET £14.7 £8.2 £6.7 -£9.5 £20.1 £7.0
E 20% ET 20% £14.7 £8.2 £6.7 -£8.1** £21.5 £5.6
E 20% EE £14.7 £8.2 £6.7 £0.0 £29.6 -£2.5
ETE £21.7 £8.2 £0.0 £0.0 £29.9 -£2.8
E 20% TE £14.7 £8.2 £0.0 £0.0 £22.9 £4.2
TTT £0.0 £0.0 £0.0 -£9.5 -£9.5 £36.6
Front E 20% means that upfront tax relief is limited to 20% for everyone
Back T 20% means that all pensioners pay income tax at 20%
* NICs rebate in respect of employer contributions
** Some 30% of pensioner income tax is paid at 40% (ref. HMRC Table 3.4)
For an explanation of EET, TEE, EEE, TTT and ETE, see the “Note on tax treatment nomenclature” at the beginning
of this report.
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Existing Child Trust Funds could automatically become Junior ISAs when the CTF product is abandoned
in January 2011.
The current tax treatment of pension savings is described as "EET" (exempt, exempt, taxed), referring to
contributions, investment growth and income in retirement, respectively. ISAs are described as “TEE”, with
contributions taxed, investment growth exempt and income in retirement exempt.
HMRC, Cost of reliefs for approved pension schemes, September 2009.
HMT, 2010 Budget Report, 2010, Table A2, page 122, footnote 4.
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