Chancellor may raid tax relief on pension savings of 6m higher earners, warns Steve Webb

By David Churchill and Simon Lambert

Up to date: 12:38 EDT, 28 August 2024

Rachel Reeves shall be ‘eyeing up’ a raid on the pension financial savings of as much as six million larger earners after figures confirmed the price of offering tax reduction surged.

The evaluation forward of Keir Starmer’s gloomy speech on the financial system discovered the online value of offering pension tax reduction climbed by £1.1 billion from the yr earlier than to £48.7 billion in 2022/23.

Round 55 per cent of reduction associated to larger earners on salaries of £50,271 to £125,140, and one other 7 per cent to extra charge payers on £125,140 or extra.

Sir Steve Webb, That is Cash’s retirement columnist and a former pensions minister, stated the figures spotlight why the Chancellor is more likely to be raiding the pension financial savings of upper earners at her first Funds on October 30.

Senior public sector employees comparable to NHS docs, high-ranking lecturers and civil servants could possibly be amongst larger taxpayers affected by the raid

The figures, which replicate how extra employees have been dragged into larger charges of tax, had been revealed forward of the Prime Minister warning of short-term ache within the forthcoming Funds.

Keir Starmer was seen to be laying the bottom for tax rises and with Labour having promised to not elevate the charges of revenue tax, nationwide insurance coverage, VAT or company tax, different methods of elevating income are wish to be focused.

However specialists have warned that altering pension tax reduction can be sophisticated, may stunt retirement saving and hit youthful employees’ financial savings tougher over the long-term.

Increased charge taxpayers affected by any such raid on their retirement pots may embrace senior public sector employees comparable to NHS docs, high-ranking lecturers and civil servants.

Sir Steve, now accomplice at pension consultants LCP, who carried out the evaluation, stated: ‘There is no such thing as a doubt that the Chancellor shall be eyeing up the big price ticket connected to offering tax reduction on pension contributions.’

Ms Reeves is anticipated to contemplate a proposal by Treasury officers for a flat 30 per cent charge of pension tax reduction.

The Treasury has lengthy needed to tax pension financial savings to lift much-needed income however successive Chancellors have rejected the plan.

Ms Reeves can be anticipated to have a look at hikes to inheritance and capital good points taxes to fill a £22 billion ‘black gap’ within the public funds she claims was left by the Tories.

Tom Selby, director of public coverage at AJ Bell, stated that whereas a lot pre-Funds hypothesis centred round higher-rate pension reduction, bringing in a decrease flat charge may trigger main issues, notably within the public sector.

He stated: ‘On the extra excessive finish, this measure may see pension tax reduction restricted to the fundamental charge of 20 per cent for all, with advocates suggesting this might elevate billions of kilos of additional income for the Treasury.

‘Nevertheless, as with most radical pension tax adjustments, introducing a flat charge of reduction is way simpler stated than completed. An enormous chunk of any potential financial savings to the Treasury from a pension tax reduction raid would come from outlined profit schemes, nearly all of which now reside within the public sector.

‘If a flat charge of pension tax reduction under 40 per cent had been utilized on these schemes, the one method to make sure the right degree of tax reduction was utilized to contributions from larger and additional-rate taxpayers can be to hit these members with a tax cost seemingly working into hundreds of kilos.

‘This may subsequently threat opening up a blistering row with NHS employees and civil servants at a time when many public companies are already stretched to breaking level.’

Pension tax reduction – may it’s raided?

That is Cash evaluation: Pension tax reduction successfully rebates any tax you’d have paid in your contributions, to place you again the place you began.

It helps the long-standing precept of saving right into a pension from untaxed earnings, which has been loved by generations of employees.

Earnings from pension pots is then taxed when it’s withdrawn in retirement.

Tax reduction can be thought-about an essential encouragement to get folks to avoid wasting into pensions.

That is one thing that has change into extra essential as employers have shifted from outlined profit schemes, the place they take accountability for retirement revenue, to outlined contribution schemes, the place employees should construct a pension pot and use it to fund retirement.

> How pensions work: Your important information to retirement saving

The tax reduction top-up to pension pots relies on folks’s revenue tax charges of 20 per cent, 40 per cent or 45 per cent.

Pension contributions sometimes get 25 per cent added routinely to take savers again to their pre-basic charge tax place: taking £80 contributed after tax again to the £100 earned earlier than 20 per cent tax.

Increased earners can then declare again 40 per cent or 45 per cent tax on their contributions above these earnings thresholds.

This appears prefer it tilts the system in favour of the higher paid, as they get extra in tax reduction. Nevertheless, that is just because they pay the next charge of tax within the first place.

An alternate system is wage sacrifice office pensions, the place employees achieve all the tax reduction profit as they swap their revenue for an extra quantity paid into their pension by their employer pre-tax.

Freezing tax thresholds has dragged extra employees into the upper charge 40p tax bracket, the 60 per cent tax lure as the non-public allowance is eliminated above £100,000, and the 45p tax charge that now kicks in at £125,140.

This has pulled in additional tax income for the federal government, however subsequently elevated the price of pension tax reduction, as extra is paid out at larger charges. The quantity being made by the Treasury from this fiscal drag far outweighs the additional tax reduction value although.

Rachel Reeves is rumoured to be contemplating a raid on pension tax reduction however this could be extremely controversial and create additional generational unfairness – as youthful employees lose the saving profit older generations loved.

It might even be extremely sophisticated and trigger points for outlined profit schemes, a lot of which at the moment are within the public sector, and wage sacrifice system pension schemes.

> How would flat charge tax pension reduction have an effect on wage sacrifice schemes?

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