The Institute for Fiscal Studies (IFS) has published a scathing review of tax and benefits proposals from the main parties, branding the triple lock “absurd” and tax-relief plans “misguided”.
The think tank’s briefing note Taxes and Benefits: The Parties’ Plans, published today, takes the Conservatives and Labour to task for proposing to overhaul an “eminently sensible part of the income tax system”.
It says the reasons for the Tory proposals on pensions tax relief are unclear, and warns that Labour’s would create a substantial cliff edge, while neither would tackle the “excessive generosity” that exists in the system.
The IFS accuses all three major parties of failing to give “serious attention to state provision for pensioners in their manifesto, despite the large cost, the scale of population ageing, and the benefits of getting the design right”.
It notes that moving to a single tie state pension and continuing the ‘triple lock’ that increases this benefit by the highest of earnings growth, inflation or 2.5% enjoy cross-party support.
It points to government data that shows the triple lock will increase costs by 0.8% of national income by 2060 and brands the policy “absurd”.
The IFS says: “There appears to be a conspiracy of silence over the future of pension indexation.”
Elsewhere the think tank says differences between the major parties on pensioner benefits are largely cosmetic.
The IFS says Tory proposals on tax, which include raising the personal allowance and higher rate income tax threshold, will cost the exchequer £900m a year. This includes raising £1.4bn annually from cutting tax relief on pension contributions and £4.6bn a year from a crackdown on tax avoidance. But thanks to a freeze on working age benefits, and £9.9bn worth of unspecified benefit cuts, the Conservatives say their tax and benefit policies overall will net the Treasury £10.3bn a year.
On the party’s main proposal on pensions – reducing the annual allowance for the highest earners – the IFS says the logic is “really not clear”. The measure would see workers lose 50p of annual allowance for every extra pound earned between £150,000 and £210,000, meaning somebody at the top end of this income range would have an annual allowance of £10,000.
The IFS says: “It is really not clear why someone earning £150,000 should be able to receive income tax relief on £40,000 of pension saving while someone earning £250,000 should only be able to receive relief on £10,000 of pension saving.”
It adds that, while only affecting only 300,000 people – about 0.66% of the adult population – the measure would further complicate the tax relief system. The think tank also questions whether the proposal would raise the desired £1.4bn, pointing out that if it results in people spending income now rather than in the future, it would bring forward tax receipts, rather than necessarily increasing them.
The IFS also takes the Conservatives to task for refusing to say where the vast majority of benefit cuts would come from, noting that “the £1.2bn of benefit cuts outlined in the Conservative manifesto are rather dwarfed by their commitment to find £12bn of cuts to annual spending by 2017-18”. It says this would require a cut of approximately 10% a year in non-pensioner benefits.
Labour is intending to raise £12.2bn a year extra through tax changes, including a similar commitment to the conservative on pensions tax relief and the obligatory commitment to squeeze more money – £6.7bn annually – out of tax avoiders. Overall the party says its tax and benefit changes will net the exchequer £11.8bn.
The IFS describes Labour plans to restrict tax relief for high earners as “misguided”. The proposal would see the rate of relief for workers earning £130,000, and whose pre-tax income plus employer pension contribution exceeded £150,000.39, drop from 40% to 20%. These savers would also see their annual allowance drop from £40,000 to £30,000.
The think tank says the problem “stems from looking at the tax treatment of pension contributions in isolation from the tax treatment of the pension income they finance”. In other words, ignoring the fact that pension contributions are excluded from taxable income because pension income is taxed when it is received, meaning tax is deferred.
The IFS says: “The tax system should treat pension contributions and pension income in a symmetric way: it is hard to see why it should be unfair for those above £150,000 to get tax relief at their marginal rate, but not for other higher-rate taxpayers to do so. Indeed, these very highest-income individuals are less likely to be only basic-rate taxpayers in retirement, removing one of the principal (although still not well-founded) arguments for restricting relief.”
On Labour’s proposal to remove the winter fuel payment from the wealthiest pensioners, the IFS says the money raised – £100m – would be “trifling”. It represents 0.05% of benefits spending and 0.1% of pensioner benefits spending.
The IFS calculates that the Liberal Democrats intend to raise £11.7bn from tax measures, including £9.7bn from “largely unspecified” anti-tax avoidance and evasion measures. The party says it will find another a £2.1bn in benefits saving, including “somewhat vague aspirations” to raise £1.9bn by reducing fraud and error.
As the Lib Dem commitment on pension taxation amounts to a “review” of the system to look at the possibility of a flat rate of relief, the IFS does not look at the possible implications to for the nation’s finances.
On the party’s plans to scrap winter fuel allowances and free TV licences, the IFS notes: “As with the Labour policy to remove winter fuel payments from these households, this is more a symbolic reform than a significant attempt to reduce government spending on higher-income pensioners.”