Employers grappling with automatic enrolment face further headaches if a single flat rate of pension tax relief becomes reality, a pension firm director says, as he also warned it could become an active disincentive to save.

According to reports earlier this week, George Osborne is set to overhaul the current system, though the Treasury’s official line was that no decision has been made.

Mr Osborne has said he will not formally respond until the March Budget about a consultation on pensions tax relief launched last year.

But the report suggested everyone would be taxed at the same rate, possibly 25%-35%, starting from around April 2017.

Brett Smith, corporate benefits director at Broadstone, said: “It looks certain to be more headaches for anyone trying to provide their employees with a pension, let alone explaining it to them or advising them.

“Spare a thought for small employers and payroll grappling with automatic enrolment – they have just got it to bed and will have to switch to new code. And for some individuals, the days of double taxation may soon be nigh.”

He believes the Government needs to be careful, warning about the message it sends to savers.

He said: “For those who aspire to a comfortable retirement and self-reliance, such a flat rate system will be an active disincentive to save through pensions, not perhaps fulfilling the title of the consultation paper ‘strengthening the incentive to save’.

He said: “It should keep to the forefront of its thinking that the pension tax breaks are not really relief but deferral, as tax is eventually paid on pension funds. If the flat rate is at the lower end, say 25%, a 40% tax payer is paying tax at 15% now and potentially again at 40% when they retire – giving an overall tax rate, on that income, of 55%.

A Treasury spokesperson said earlier this week: “The government launched a wide-ranging consultation on the system of pensions tax relief last summer.

“We have not decided on whether or how to reform the system and are considering all options, including retaining the current system.

“This consultation is now closed. We are considering the responses and will respond at the Budget.”