The £70bn pension tax raid that Reeves be unable to resist

Telegraph

3 days ago

Rachel Reeves is eyeing up your pension. The Chancellor is struggling to balance the books, so where better to look than Gordon Brown's favourite cash cow?
It is becoming increasingly likely that she will have to follow in the footsteps of the chancellor whose framed photo she kept as a student, by launching a raid on retirement pots this autumn.
As Torsten Bell, the pensions minister, highlighted conspicuously last week, the Government offers tax relief worth £70bn every year to encourage workers to save.
While he insisted that incentives to save were 'a good thing', Bell refused to rule out a raid in the future.
But while pensions might be a tempting target, the risk of unintended consequences is high.
By taking a slice of pension savings, Reeves could inadvertently discourage people from stashing money away or lead to lower pay for the very people that Labour promises to protect.
Roughly £12.8bn of individual contributions were made to personal pensions in 2022-23.
Data published by the taxman show that in 2022–23, the Government gave up £46.8bn it would have collected if pension contributions had been subject to income tax.
That is in addition to £24bn it would have raised if employer pension contributions had been subject to National Insurance (NI) contributions.
Another telling statement by Bell this week was that the Government wanted to ensure that people are not 'taxed twice' on the money they save for retirement.
He said: 'What does the pension tax system do? It makes it easy for people to smooth their incomes over their lifetime. We're not taxing you twice. That is an important feature of most tax systems, and it will remain an important feature.'
But that statement still leaves some low-hanging fruit for the Chancellor to pluck.
The first is salary sacrifice, where staff agree to forego a portion of their salary in return for the same amount being ploughed into a workplace pension.
As a result, employees can reduce their NI contributions and benefit from tax relief on the money they add to their pension.
Employers, who already don't pay NI on an employee's pension contributions, can also reduce their tax bill further because the sacrifice serves as a pay cut.
Pensioners do not pay NI, leaving scope for the Government to start taxing one side of this equation and still abide by this principle.
HMRC estimates that it lost out on £3.9bn in NI receipts because of salary sacrifice schemes, which would be a princely sum for a cash-strapped Chancellor.
In addition, employees currently benefit from roughly £6bn a year in income tax relief through salary sacrifice.
'A generous and opaque subsidy'
The Institute for Fiscal Studies (IFS) has urged the Government to go further by moving towards levying NI on employer pension contributions as a principle.
Carl Emmerson, the deputy director of the IFS, describes the absence of NI on employer pension contributions as 'a very generous and very opaque subsidy' that if removed entirely, could boost the Treasury's coffers by more than £17bn a year.
However, with businesses still reeling from a £25bn NI raid on employers, this would be a politically toxic move, and one that Emmerson says will have consequences for working people.
'It would almost certainly put downward pressure on pay, and would also make government spending less generous because lots of public sector workers get generous employer pension contributions, and those public sector employers would find their national insurance bills going up,' he says.
To ease pressures, Reeves could choose to reimburse public sector employers as she did during last autumn's raid.
The Resolution Foundation has estimated that doing so would cost £5bn – though the measure would still raise £12bn.
A more radical option would be to restrict the income tax relief that applies when a worker makes pension contributions at a flat rate of 30pc.
This would benefit those on modest income, but at the expense of higher earners.
Economists estimate the measure would affect up to 6m higher and additional rate taxpayers, costing the wealthiest savers about £2,600.
HMRC estimates show that 37pc of income tax relief on total contributions is provided at the basic rate, just over half at the higher rate and 7pc at the top 45p rate.
However, Sir Steve Webb, a former pensions minister, says the Treasury has shied away from this reform because of its hideous complexity, as well as the significant impact it would have on public sector workers and the implications for their gold-plated, final-salary pensions.
Sir Steve says: 'The challenge for the Government with potential cuts to pension tax relief is that a significant part of the existing tax break goes to long-serving and senior public servants, typically in defined-benefit pension arrangements.'
Any cut to higher rate relief or tax-free lump sums would affect many such workers adversely at a time when the Government already has issues with the public sector workforce over pay.
As this group is part of Labour's core voting base, it is likely to be wary of alienating them further.
'Constant meddling'
Baroness Altmann, another former pensions minister, warns that changes to pensions, including Reeves's decision to bring pension pots into the scope of inheritance tax, could leave many people without the means to support themselves later in retirement.
'The constant tax meddling has been a disaster for pensions,' she says.
Altmann warns that private sector employees are likely to be left footing the bill for any further changes.
'We're already subsidising hugely generous public sector pensions that the private sector can almost never dream of,' she says.
There is also another element of the pensions system that is currently tax-free on the way in and out: the amount that can be taken from pension pots.
Tax-free lump sum
Currently, people can take up to 25pc of any pension as a tax-free lump sum when they reach 55, up to a maximum of £286,275.
Reducing the amount to £100,000 would affect about one in five retirees, and raise £2bn in the long run, according to the IFS.
A similar proposal is being pushed by the Labour-affiliated Fabian Society, and it is understood that Treasury officials have urged previous chancellors to look at the relief, which costs about £5.5bn a year.
Emmerson says: 'If you've already got £900,000 in your pension pot, it's not obvious why the taxpayer should be subsidising you to put more in your pension. These people can't really claim that they're under-saving for retirement.'
However, he makes a more obvious point that should make Reeves think twice if she wants to raid workplace pension savings.
'This would almost exclusively be paid by workers,' he says.
A Treasury spokesman said they were 'committed to keeping taxes for working people as low as possible'.