- Treasury officials have a long-standing dislike of tax reliefs on pensions
- These benefit higher earners the most
- Scrapping them has knee-jerk socialist appeal
All change: Chancellor Rachel Reeves
Rachel Reeves is expected to produce a report tomorrow into the catastrophic mess she wants us to believe the Conservatives made of the economy. It is of course a transparent fig leaf for her plans for a multi-billion pound tax raid.
There are widespread fears that this will include pensions tax relief.
Labour has form: Gordon Brown’s shameful attack on retirement fund dividends was the death knell for final salary schemes in the private sector, which once were the envy of the world.
Reeves has ruled out increases in the so-called Big Three – income tax, National Insurance and VAT. Her revenue-raising options are therefore limited and pensions look like a sitting duck.
Ask anyone in the pensions industry and they will tell you Treasury officials have a long-standing dislike of tax reliefs on pensions which benefit higher earners the most. Scrapping them has a knee-jerk socialist appeal.
Under the current system, people receive tax relief on pension contributions at their highest marginal rate. For someone earning a six-figure salary and paying 45 per cent income tax, each £1 contribution into their pension plan would cost them just 55p. For a lower earner on basic rate tax, a contribution of £1 would cost 80p.
It does on the face of it seem unfair.
But one suspects those Treasury officials hate higher-rate pension relief for reasons of cost rather than equity. Maybe it is urban legend, but they are said to have put a plan to get rid of higher-rate pension reliefs on the desk of every chancellor since George Osborne.
One option likely to be proffered to Reeves is a flat 30 per cent rate of relief across the board. She has in the past advocated the idea herself. Before the election, she shied away from it, but didn’t definitively rule it out. She should.
It would not only be vindictive, hurting around six million voters earning more than £50,000, but also counterproductive.
Any issues with tax relief are dwarfed by a far bigger pensions problem: the fact that nearly four in ten of us are not saving anywhere near enough.
Eroding the tax incentives is likely to make that situation even worse.
This would be a particularly bad moment to curb pensions relief, as millions of moderate earners are being dragged into higher tax brackets because of a multi-year freeze put on thresholds and allowances.
Attempts to clamp down on pension tax breaks for the better-off have perverse consequences.
We saw that with the lifetime limit on pension pots, with a super-tax of 55 per cent on savings above the ceiling, which was abolished by Jeremy Hunt. Rather than raise loads of lovely tax revenue, it encouraged valuable employees such as senior doctors and head teachers to retire.
Labour has sensibly backed away, for now, from plans to re-instate it. Attacking higher rates of relief on contributions could have a similar effect.
If less is going into people’s pensions, it will hamper Reeves in her mission to use the nation’s retirement funds to invest in much-needed infrastructure.
One irony is that the often-criticised complexity of pensions may thwart any plans to abolish higher rate reliefs.
And Labour would face a big backlash if NHS staff and civil servants were confronted with big tax bills on their own and their employers’ contributions. Let’s hope this acts as a deterrent.
A pension pickpocket in Number 11 is the last thing the country needs.
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