Treasury officials have submitted ideas that would persuade Rachel Reeves to plunder the pension funds of up to 6 million middle-class workers ahead of her first Budget.
A proposal for a flat 30 percent rate of pension tax relief is anticipated to be considered by the Chancellor, which would result in higher rate payers paying an effective 10 percent tax charge on their retirement payments for the first time.
Up to 6 million higher and extra rate taxpayers would be impacted by the proposal, which would cost the wealthiest savers some £2,600.
Although Ms. Reeves has advocated for limiting pension assistance, she has now distanced herself from the ideas and stated that she has “no plans” to alter the status quo.
Contributions to pension plans are tax deductible. Accordingly, basic rate payers receive a relief equivalent to twenty percent of their contributions, which eliminates the income tax that would have otherwise been owed. Higher rate payers—those making above £50,270—are eligible for 40 percent assistance; most additional rate payers—those making over £125,140—are eligible for 45 percent relief.
The Exchequer bears the annual cost of these provisions, which include income tax relief, corporation tax relief, zero tax on pension increases, and the exemption of employers from paying National Insurance on employer pension contributions.
Since the coalition government came to office in 2010, the Treasury has been pushing for the taxation of pension funds and has even supplied chancellors with a comprehensive strategy for the raid.
The table contains proposals for flat rates of 20 and 30 percent. According to sources, a 30 percent rate would be more politically palatable since it could be portrayed as a government handout to millions of basic rate taxpayers, essentially topping up their pensions.
Higher and extra rate payers would, however, be subject to an effective 10 percent or 15 percent fee as a result.
Any alteration would be met with protests in the pension sector and worries that a large number of individuals will cease making contributions. Because withdrawals made after retirement are also subject to income tax, this might result in the wealthiest earners paying taxes twice on the same income.
According to the Institute for Fiscal Studies (IFS), a 30pc flat rate would result in an increase in taxes of £2.7 billion. The poorest 80% of earnings would save around £230 annually under the scheme, while the wealthiest 10% would experience an average tax hike of just less than £2,600 annually.
According to the IFS, limiting income tax relief to the basic rate would result in a £15.1 billion tax increase, or around a 2p increase in the income tax basic rate.
According to the think tank, the top 20% of earnings would bear the brunt of this “substantial increase” in taxes, with the top 10% suffering an average blow of £4,300. The IFS predicted that the poorest 80%, who mostly benefit from basic income tax reduction on pension payments, will see little to no change.
According to those with knowledge of the proposals, switching to a fixed upfront relief rate of 30 percent may help “level up” the savings landscape by providing more substantial support for most workers, who would gain annually by hundreds of pounds.
Ms. Reeves penned a 66-page paper in 2018 while serving as the chairperson of the business select committee, detailing a number of tax measures, including a restriction on pension assistance. “Private pension funds hold 40% of UK wealth,” the speaker stated. Restrictions on higher rate pension contribution reliefs might be implemented to counteract this discrepancy.
In 2016, two years prior, she suggested that the relief be set at a fixed rate of 33 percent. A rate of 32 percent, according to the IFS, would be nearly revenue neutral. However, millions of individuals are anticipated to be forced into higher tax bands in the upcoming years due to the personal allowance freeze.
Experts predicted that a 30 percent tax rate would compel the Treasury to limit salary sacrifice pension plans, which already offer businesses and employees a tax-efficient means of contributing to workplace pensions.
This plan, which could raise up to £3 billion annually, has also been thoroughly studied by the Treasury. Additionally, study on limiting relief on employer and employee National Insurance contributions has been done.
The former minister of pensions and partner at pension consultants LCP, Sir Steve Webb, countered that it would act as a deterrent to companies doing the right thing by penalizing those who make large contributions to workplace pensions.
According to research from the London School of Economics, the greatest motivator for people to save was the generous employer contributions for workplace pension plans, which increased the likelihood that an individual would save into a pension by 71 percent.
According to Sir Steve, it would be extremely difficult to expand the limitations to defined benefit plans, which provide a retirement income that is guaranteed based on professional earnings.
This is due to the fact that employers provide the majority of funds to these programs. Limiting relief to the basic rate, for instance, would be the same as giving higher rate taxpayers a taxable advantage. In the case of an urgent tax charge, this might lead to massive tax costs or decreased pensions.
According to Sir Steve, it would seem fair to provide everyone the same rate of tax relief on their pension payments, but doing so would be very difficult for the millions of workers enrolled in traditional salary-related pension plans.
Employers make up the majority of the payments to these programs, and no tax deduction is made. Higher earnings may be subject to a tax surcharge on both their personal and employer-paid payments to the program if they were to lose higher rate tax relief. In certain circumstances, this charge might cost hundreds of pounds annually.
“We have laid out the need for economic stability and we have started repairing the foundations so we can grow our economy and keep taxes, inflation, and mortgages as low as possible,” a Treasury spokeswoman stated.
This comes as Ms. Reeves informed her cabinet colleagues that her first budget, which will be unveiled in the fall, will need “tough decisions” on taxation and expenditure.
The message was sent by the Chancellor ahead of her approval of public sector pay increases that are higher than inflation in a statement to Parliament the following week.
The strategy, adopted in part to prevent additional strikes, has increased the strain on public budgets as Labour tries to figure out how to pay for the change.
Already, Ms. Reeves was balancing how to honor her campaign pledges to not raise taxes on working people, to refrain from “austerity” expenditure cutbacks, and to have debt paid off in five years.
Following an internal examination, the Chancellor will reveal to the public next week the extent of the pressures on public expenditure that the Labour government inherited.
However, the Conservatives have asserted that Labour is misrepresenting how terrible its economic legacy is in order to gain political room for a tax rise later in the year.