The government has been urged to announce a full review of the UK’s pension tax rules in the upcoming Budget, with a ‘double your money’ alternative proposed by Hargreaves Lansdown.

The firm has proposed a three tier alternative system which would see tax relief on employee contributions fully abolished.

However, an increase to minimum employer auto-enrolment contributions, from 3 to 5 per cent, would double employees contributions, which Hargreaves Lansdown said would negate the need for tax relief.

Employer contributions would continue to be a tax-deductible business expense, with a salary cap on auto-enrolment contributions of £100,000.

The second tier of the proposals would give employers the option of offering employees the right to pay an additional 5 per cent of their pay into their pension, which would again be met ‘£1 for £1’ by employers, giving a potential maximum total pension contribution of 20 per cent.

The third tier would address issues surrounding those in self-employment, with an additional savings allowance also available for those ineligible to save in a workplace pension, or who wish to make additional savings.

Hargreaves Lansdown proposed that this allowance be set at £10,000 per individual, and include a ‘£1 for £1’ top up from the government, equating to an additional allowance of £20,000.

The firm emphasised that the cap on annual contributions would allow the lifetime allowance to be scrapped, with an “effective maximum annual allowance” of £40,000 for those earning over £100,000.

The government confirmed that a review of the tapered annual allowance was underway in January, in order to address the ongoing NHS pensions crisis, however industry experts have now called for a broader review of the tax system.

This also follows reports that the Treasury was preparing to give further tax relief to those earning over £110,000 to solve the NHS pensions crisis, which received similar industry criticism for not fully addressing the issue.

Hargreaves Lansdown senior analyst, Nathan Long, said: “The UK’s whole pension tax relief system is a bloated expensive mess, riddled with problems and inconsistencies.

“Any attempt to fix the taper and net pay problems in isolation is likely to make the situation worse as it heaps in further complexity.

“We urge the government to take advantage of this window of opportunity, to improve people’s retirement prospects, get better value for money for the taxpayer and reframe any government spending as an incentive not a subsidy.”

Long added: “Most people don’t even understand how tax relief works, yet the government spends over £50bn a year on it.

"For many people, it’s just not working, this includes; the self-employed, high earners, low earners, non-earners such as women taking a career break and those who have retired and then gone back to work.

"The big winners from the current system are people on above average incomes, provided they don’t earn too much, and public sector workers in final salary schemes. This just doesn’t stack up as a fair deal across society anymore.”

The proposal follows a number of issues stemming from pensions tax, including concerns over unclaimed tax relief, savers in ill health early retirement facing unexpected bills, and annual allowance issues triggered by pension freedoms.

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