“Tax reliefs are a critical tool used to incentivise positive behaviours, whether it be to encourage long-term saving or reward innovation. Pension tax relief, for instance, is a highly effective mechanism for incentivising people to save for the future. By providing tax relief on money paid into a pension the system offers a tax deferral mechanism. This creates a clear incentive for people to save for the future, while the income tax they pay on withdrawals from their pension means they are discouraged from withdrawing at an unsustainable rate in retirement.
“It is right that MPs scrutinise carefully the value of tax reliefs to ensure they offer good value for money. Where they are found to be failing to encourage the right behaviours they ought to be reconsidered, but we also need to exercise caution about the message this sends out and take a balanced approach. Entrepreneurs Relief is a good example of this. It was cut dramatically at the last Budget on the basis that it wasn’t deemed particularly effective at encouraging people to launch start-up companies. However, in cutting the relief Government also risked sending a negative message to the entrepreneurs of tomorrow. This may be why the Chancellor settled on a compromise solution of capping relief, rather than cutting it entirely.”