Is Rachel Reeves planning a £24bn pension tax raid?
It has been reported that the Treasury is considering what could amount to a £24bn pension tax raid as Rachel Reeves tries to plug her £22bn budget black hole.
The Chancellor has reportedly been looking at tax relief on pension contributions, specifically, employers’ national insurance relief.
There are two forms of national insurance. Employees, paid by the employee, and employers, paid by employers on the earnings of those they employ.
Under current rates, employees national insurance is set at eight per cent for those earning up to £967 per week. The rate of employers national insurance is set at 13.8 per cent.
However, this tax is not applied if money is paid into a pension as part of a salary sacrifice scheme.
Reports emerged yesterday that the Treasury had discussed the feasibility of scrapping this relief with major pension providers.
Former pensions minister Steve Webb said this was the “most likely change” he expected to be in the budget.
Scrapping the tax break could bring in as much as £23.8bn every year, calculated Webb, who is now a partner at LCP. This would be enough to fill the government’s supposed £22bn black hole.
However, fears have swept the City that the pension tax could cause the already weak levels of retirement contributions to nosedive further.
“Around half of people are not saving enough for retirement, so the government should think very carefully, and consult widely, before it changes the tax treatment for pension saving,” Nigel Peaple, chief policy counsel at pension trade body The Pensions and Lifetime Savings Association, told CityAM.
The policy chief warned that while the billions in revenue may look “appealing” to the government, it needed to consider that the policy would “have harmful effects on pension saving”.
The news has also brought warnings that the policy could potentially create “significant unemployment” and “bring a large number of small family businesses to a close,” said Ian Goodwin, employment tax partner at Forvis Mazars.
Small businesses would potentially struggle to pay the extra 13.8 per cent in National Insurance, as well as potentially reigniting higher inflation as businesses “look at increasing prices to stay afloat”, Goodwin added.
Why a pension tax?
Chancellor Rachel Reeves has been forced to consider novel ideas to raise revenue after Labour’s election pledge to not raise income tax, national insurance, VAT or corporation tax.
This has left her considering a variety of solutions to raise tax elsewhere, especially though the elimination of tax relief on areas like AIM stocks, or in this case, pensions.
“The big advantage for the Chancellor is that in most cases this would have no immediate paypacket effect on voters, so would have lower political saliency,” explained Webb. “It could also be implemented relatively quickly.”
However, while the idea might seem simple on its face, it would target an area that Labour itself pledged to improve, calling in its manifesto for a review of the pensions landscape to ensure people retire with more in savings.
“It would therefore seem counterintuitive for the government to be considering policies that may make it less attractive to pay into your pension,” noted Brian Byrnes, head of personal finance at Moneybox.
“Making sure that everyone has enough saved for their retirement is one of the biggest societal and economic challenges we face today,” he added.
Director of Fairview Investing Ben Yearsley described the idea as “daft”, as the tax would simply “be counter productive in the long run”.
As tempting as the pension tax seems, “there is no simple way to extract money from the pensions system” without limiting how much people are able to live off after they retire, he argued.
Goodwin also noted that the changes would be especially costly for defined benefits schemes, notably the public sector’s pension schemes.
“If these public sector pension schemes are protected from this change being introduced, it would create an even greater divergence between private and public sector pensions and costs,” he said.
Other pension changes suggested by Webb include instituting a ‘pension death tax‘ or implementing a cap on tax-free lump sums, though he said the latter would be too complex to consider.
The lifetime limit on tax free lump sums is currently £268,275, but LCP said cutting the limit would require a complex set of protections to bring in.
“We do not comment on speculation around tax changes outside of fiscal events,” a Treasury spokesperson told CityAM.