Market leading insight for tax experts
View online issue

Pensions tax in the crosshairs?

printer Mail

As the UK government looks for ways to raise additional tax, pensions tax relief could again find itself under scrutiny by the Treasury. With increases in the rates of income tax, NICs and VAT all but ruled out, and with potentially very limited room for manoeuvre, the government may be tempted to reconsider breaking the pensions triple lock, restricting higher rate relief or possibly applying employer NIC to pension contributions. The triple lock guarantees that state pension will rise by the highest of (a) average earnings growth in the quarter to July, (b) inflation, or (c) 2.5%. With headline wages rising by 5.6% a year, as recorded in the three months to April 2021, the Treasury is likely to feel pressure to change direction.

Robert Salter, a director and client tax specialist at Blick Rothenberg, said any of these options ‘will come with significant political and tax issues’. Salter added ‘if the government looks at restricting the amount of tax relief which is provided to employees and workers – either on an annual basis or from a lifetime allowance perspective – it could easily discourage pensions savings and/or act as an incentive for highly skilled employees to stop saving for their retirement or retiring early’, citing the example of the annual allowance taper which inadvertently impacted senior NHS doctors.

Reducing the lifetime allowance limit from the current £1.073m would also potentially have a punitive effect for private-sector employees in particular, most of whom are now in defined contribution schemes and already face historically low annuity rates.

Other potential options might include charging employer NICs on pension contributions – which would negate the value of salary sacrifice arrangements under which many schemes currently operate in order to maximise value for the scheme member (or save money for the employer, or both) – or reversing the current principle of taxing pension when it is received rather than when contributions are made. Salter noted that, although both ideas would be unpopular, tax relief on pension contributions costs the Treasury in the region of £21bn per year in tax relief.

Salter acknowledged the damage such proposals could inflict: ‘the reality is that further adjustments to UK pension contributions could further undermine the whole basis of private pension provision in the UK and create a fundamental lack of trust in the pension system and the idea of one legitimately receiving Government support to plan for one’s eventual retirement.’

Boris Johnson had recently refused to deny reports that the chancellor was considering suspending the pensions triple lock as part of Covid recovery plans, with the Independent suggesting the Treasury had been considering a number of the options outlined above. The Financial Times subsequently reported, however, that Downing Street had vowed to ‘stick with the triple lock’ .

Issue: 1537
Categories: News