It is clear to me that pensions will come in for a kicking in October 2024. I expect the 2024 tax raid to be as impactful as Gordon Brown’s raid on dividend tax relief at a similar stage in the Blair/Brown Government. This blog looks at what is at stake and what is at risk and draws a firm conclusion.
The prime minister yesterday made it clear that the October budget would be painful. With most major taxes ringfenced and protected by the Labour party manifesto, pension perks look ripe for pruning.
The BBC’s report on Keir Starmer’s doom-laden speech concurs
The public, he said, should be prepared to “accept short-term pain for long-term good”.
He did not detail what measures would be in the Budget but repeated his election promise that national insurance, VAT and income tax would not go up.
Last month, Chancellor Rachel Reeves said she thought she would have to increase taxes in the Budget and did not rule out increasing inheritance tax, capital gains tax, or reforming tax relief on pensions.
By unhappy coincidence, the Fabian Society chose today to launch their pruning recommendations.
The ABI sponsored the Fabian’s last report, they won’t be sponsoring this one. Those working in the financial services industry do very nicely out of pension tax relief – the revenues from rents on tax-payer money afford them the salaries which pay the pension contributions and an unequal share of the perk pot.
Tax relief on pension contributions was worth £66bn in 2022/23, an
increase of 55 per cent since 2016/17. Only one third of pension tax relief
was offset by tax revenue from pensions in payment (£22bn in 2022/23).
Pensioners , despite losing winter fuel payments, are also reckoned the beneficiaries of the tax system enjoying large amounts of tax-free cash, no national insurance on pensions in payment and more than their fair share of the healthcare budget.
The Fabian’s report stops short of criticising pensioners as workshy but there aren’t many other punches that it pulls.
• More than half of tax relief (an estimated 53 per cent or £35bn in 2022/23)
went to upper and top rate taxpayers who make up just 19 per cent of
employee taxpayers. Only an estimated 35 per cent of tax relief on
pension contributions benefited women.
• £56bn of tax relief on contributions (84 per cent) was associated with
employer pension contributions, so it is essential that these are included
in any reforms
MRC last estimated the cost of the policy in the early 2010s at £2.5bn per year.8 The Institute for Fiscal Studies (IFS) estimates that in the long term scrapping the policy will increase the tax associated with a year of pension contributions by £5.5bn.
Forestalling – stopping something happening by acting first.
I didn’t take my tax-free cash when I drew my company pension but I’m seriously considering drawing my tax-free cash before the budget, I need every penny and a whole lot more to pay off my mortgage.
The Fabians are clear calling on Rachel Reeve to
Reform taxation of pension lump sums, by reducing the maximum value of the lump sum that is free from income tax.
Continuing
MRC last estimated the cost of the policy in the early 2010s at £2.5bn per year.8 The Institute for Fiscal Studies (IFS) estimates that in the long term scrapping the policy will increase the tax associated with a year of pension contributions by £5.5bn.
The Treasury had a go at capping tax-free cash when they got rid of the LifeTime Allowance. It worked, no-one now can take more than £268, 275 tax-free from their pot or as commutation from their DB pension scheme.
The Fabian Society want tax-free cash cut back to £100,000. That would be pain I couldn’t afford. I’m forestalling because I have to.
And I take the point that every penny of cash, is a penny less buying a pension
Punish the pensioner
The Fabians warm to their theme
• Charge national insurance on private pension incomes in payment (with an annual allowance that would exempt people with small pensions).
This could be in exchange for retaining the winter fuel payment.
• Fairly tax the inheritance of pensions by subjecting pension assets to inheritance tax and to income tax when the deceased is below 75
By the time I got to the section on taxation of pension tax relief, I knew what was coming. A flat rate of tax relief on all DC contributions , with employer contributions taxed as a benefit in kind.
Employer pension contributions would become taxable
income, and then the new single rate of income tax relief would apply to both employer and employee contributions.
Except that this would mean a new type of tax that you’d pay at a marginal rate over 25%. And of course this would have to be accounted for against tax thresholds and worked out on self-assessment.
It is, as David Robbins points out, right to point out that employer contributions need to be re-taxed, but the arguments being put forward are too facile to be the basis for serious consideration.
Unlike many proposals for changing pensions taxation, this @thefabians report recognises that changes would have to apply to employer contributions too and that this is complicated for DB. But:
1. You can’t just say, “carve-outs or separate but parallel reforms should be… https://t.co/K0MQoEAfpi pic.twitter.com/IboLv56U98— David Robbins (@David_J_Robbins) August 27, 2024
The pain of the 2016 review of tax relied on contributions still lingers. The failure to wring anything from that review, a permanent embarrassment to Treasury and the Osborne/Cameron Government.
No Government or Treasury team in its right mind would embark on reform on such flimsy analysis as is in the Fabian’s report. Governments look for quick wins that will stick. Expect the pension pruning to be brutal and effective, just as Gordon Brown’s was.
A quick win that will stick
Do you see why I fear change on tax-free cash? At least you can do it!
But the Fabians don’t need to worry about getting this stuff done. Which is just as well for them and us.
Time for a bit of fun from Dave , Rat , Tony and the Good Captain. If you are- or are shaping up to be – a pensioner, this one’s for you.
Henry. If you are an impoverished FAS pensioner, like me, then a 100K GBP tax free payout would be a fortune. I have already been taxed over the last 25 years by all parties in government and meanest of MP’s decisions in the H of C. When will we hear the outcome of the March 2024 WPSC Report on relief clause 161? The mean withdrawal of the Winter Payment on fuel will be slap-in-the-face for all past their NRD. You have never had it so good, Henry.
Regarding the winter fuel payment, an obvious first step is to make it taxable like the rest of the state retirement pension. Clawback from the wealthy, and removes the cliff-edge from those just above the level for pension credit.
Peter, I presume you mean this WPSC recommendation:
“Financial Assistance Scheme (FAS) members are likely to have more of their service before 1997, so are particularly likely to be affected by non-indexation of pre-1997 benefits. Any improvements for PPF members should also apply to FAS members. Given the age of many FAS members, the Government should legislate as a matter of urgency to provide indexation on FAS compensation for pre-1997 rights, where their schemes provided for this, funded by the taxpayer. The Government should review the Financial Assistance Scheme, including looking at the case for removing other discrepancies in FAS compensation, compared to the PPF, such as the continued application of the compensation cap and lack of interest on arrears. (Paragraph 161)”
Taking WASPI compensation, for a comparison “outcome”, we had this from
the incoming Labour government:
Released on 13 June, the 2024 Labour campaign manifesto contained no reference at all to WASPI compensation or the recent Parliament and Health Service Ombudsman report.
According to a Scottish newspaper, the Daily Record, during a press conference before Labour released its campaign manifesto Shadow Chancellor Rachel Reeves said: “There are lots of things that a Labour government might like to do, but the state of the public finances and the dire need of our public services means that we won’t be able to do everything that we might like to do.”
She went on to say: “We won’t put forward anything that is not fully costed and fully funded, and I haven’t set out any money for this [compensation for WASPI women].”
Richard. Well, that is typical of the way that our governments ‘run roughshod’ over our elderly vulnerable pensioners. It’s also quite typical of them making it a gender issue (WASPI) and ignoring others and Ombudsmen/persons!