Slowly but surely, we are starting to find out what the Chancellor of the Exchequer has in store for our pensions when the budget arrives on 30 October.
Unfortunately, it’s not a particularly enjoyable read (more Stephen King horror than Jilly Cooper joie de vivre).
With less than three weeks to go until Rachel Reeves’ version of Pensions Doomsday, it looks like things can only get worse – rather than better – on the pensions front.
Yes, ladies and gentlemen, the Chancellor has turned Labour’s 1997 election campaign song (Things Can Only Better by D:Ream) on its head. The 2024 version now is that things can only get worse (when it comes to pensions and our personal finances in general).
Rachel Reeves was considering a radical reform of tax relief on pension contributions. But they warned him that it would upset up to a million public sector workers.
So what have we discovered so far? Well, leaks from Treasury sources earlier this week indicate that a radical overhaul of tax relief on pension contributions has now been put on the back burner (it could resurrect the idea in a future Budget if the Government’s finances are in a disaster).
The idea was that, instead of the amount of tax relief being based on whether you are a basic, higher or additional rate taxpayer, a fixed rate of relief would apply. So instead of a respective tax break of 20, 40 and 45 percent, the three groups of taxpayers would all get the same rate, say 30 percent. Great for basic rate taxpayers, but bad news for the growing groups of higher and additional rate taxpayers.
You would have thought that Mrs Reeves would have been delighted to introduce such radical pension reform. Egalitarian, socialist, very political, an effective tax on the ‘rich’.
But he chickened out because he was warned that it would upset up to a million public sector workers who would have lost out due to higher taxpayers or additional rates. When public sector unions bark, the Chancellor bends.
Yesterday we learned a little more about pensions in Prime Minister’s Questions (PMQs). A fit and firing Rishi Sunak (still the opposition number one) pressed Sir Keir Starmer on whether the Government would impose National Insurance Contributions (NICs) on employers’ payments to employees’ workplace pensions .
Sunak said the Prime Minister had “opened the door” to increasing National Insurance pensions. The Prime Minister refused to shut it down, simply stating what we have heard from him countless times in recent weeks: namely, the Labor Party had made an “absolute commitment not to raise taxes on workers”.
Opposition leader Rishi Sunak criticized Sir Keir Starmer at Prime Minister’s Questions, saying he had “opened the door” to increasing national insurance on pension contributions.
The Prime Minister did not deny this, simply stating that the Labor Party had made an “absolute commitment not to raise taxes on workers”.
For the record, this commitment means that Labor will not increase income tax rates, National Insurance contributions for workers and VAT. This gives you leeway to apply NICs to employer pension contributions.
For a government with big spending plans, levying this tax on employers seems like a no-brainer. A report last month by pensions consultancy Lane Clark & Peacock (LCP) said applying a 2 per cent NIC charge on employers’ pension contributions would generate £2bn a year in revenue prosecutors.
However, this would have negative consequences. It would be yet another cost that businesses (especially small ones) must face – and on top of the costs of complying with the new (and crazy) Employment Rights Bill that Deputy Prime Minister Angela Rayner is determined to overcome.
As Craig Beaumont, chief executive of the Federation of Small Businesses, said after PMQs: “Adding employer NICs to pension costs would be a way to further reduce small business employment in 2025 – exactly what contrary to what we all want and need to see.’ Hit the nail.
Workers may think that a NIC tax on employers’ pension contributions does not concern them. Maybe not immediately, but it could affect them much later if, because of the tax, their employer decides to cut their pension contributions. This would mean smaller pension funds for retirement.
The tax could also result in employers cutting jobs to cut costs. Without work, no employer pays your pension.
So, to summarize, there will be no change to the tax relief on pension contributions on 30 October. And there will almost certainly be a tax on employer pension contributions.
What we don’t know for sure is what the Chancellor has in mind regarding the tax-free cash we can withdraw from our pension fund.
Currently, most savers can access 25 per cent of their pension tax-free once they turn 55, up to a limit of £268,275. However, if everyone is reading the runes correctly, Mrs Reeves seems willing to give him the limit of a ‘grade one’ haircut, perhaps a shave up to £100,000. This, experts say, would also raise £2 billion a year in additional tax revenue.
The expected cut has already persuaded many people to access their tax-free cash ahead of the Budget. And unless Ms. Reeves (or her leaky Treasury officials) make their intentions clear, more will do so before October 30.
Clarity on this issue is essential. It is leading some people to make irrational decisions, for example accepting tax-free lump sums when they have no specific use for them or an Individual Savings Account available in which they can invest it to keep the money tax-free.
Of course, there are many other things Ms. Reeves could do with the pensions in her budget; for example, reducing the maximum amount that can be put into a pension per tax year (currently £60,000).
It could also catch us by surprise by reintroducing the lifetime allowance for pension savings which, if exceeded, would result in additional taxes on the surplus.
Jeremy Hunt, the previous Chancellor of the Exchequer, abolished the allowance. In opposition, Reeves first said he would reintroduce it, with exceptions for certain key public sector workers such as doctors. Then she did a spectacular 180 by saying she wasn’t bringing him back after all.
Another U-turn is unlikely, but nothing can be ruled out with this Chancellor.
With the Institute for Fiscal Studies claiming that Labor must increase taxes by up to £25bn to ensure the country does not sink into an era of austerity, nothing can be ruled out. Our pensions are at risk like never before.
Things can only get worse.
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