Chancellor Rachel Reeves has declined to rule out increasing taxes on pensions in the upcoming Budget, sparking fresh warnings over “anti-growth” policies.
Speaking in the Commons on Tuesday, Reeves refused to “speculate about what will be in the Budget” when asked to give savers “peace of mind” over rumoured annuity levies.
Despite failing to give assurances on pensions, the Chancellor reiterated her pledge to cap corporation tax at 25 per cent in this Parliament, to “retain full expensing”, and outline a “tax roadmap” for firms.
AJ Bell’s Danni Hewson welcomed Reeves’ “tentative steps forward” but admitted: “It’s tough for UK businesses to get fired up when there’s still so much gloom around.”
She added: “The initial honeymoon seems to have hit a rough patch after rose scented warnings that the worst is still to come.”
But the Treasury was cautioned over “unintended consequences” and “practical problems” as it seeks to raise revenue to plug a supposed £22bn black hole in the public finances.
“Stand-alone piecemeal changes run the risk of unintended consequences,” Helen Morrissey, head of retirement analysis, at Hargreaves Lansdown, advised.
She warned that “fewer than two in five people are on track for a moderate retirement income, which is set at £25,000 per year for a single person and £36,480 for a couple”, adding that some high earners could be set for an “income shock in retirement”.
A number of potential changes have been rumoured, such as moving to a flat rate of tax relief or cutting the amount pensioners are able to withdraw from their pension pots tax-free.
While a recent report from the Fabian Society suggested that a collection of pension reforms could raise around £10bn a year for the Exchequer, Treasury officials have reportedly been in favour of a flat rate of tax relief for many years.
Steve Webb, partner at pension consultants LCP, stressed that pension tax relief changes were inevitably under considerable pre-Budget scrutiny, given Labour’s pre-election pledges “limiting the scope for increasing income tax, National Insurance and VAT.”
It “will be seen as a potential source of significant savings,” the former coalition-era pensions minister added. “Flat rate relief could raise a lot of money… but has both political and practical problems.”
Many higher rate relief beneficiaries are top public servants in defined benefit schemes, Webb noted.
“These sectors are heavily unionised and Labour might face a big backlash if it tried to raise serious revenue… and it would seem odd to hit them on pensions having chosen to prioritise improving their pay – it’s also very difficult practically to do flat rate relief on defined benefit.”
The Treasury could consider altering NI relief on employer contributions, Webb added, which is worth “many billions but largely invisible” – but could risk being seen as “anti growth”.
“There are a wide range of changes which could be made, but big structural changes seem unlikely,” he noted.
Reeves was asked by shadow Treasury minister Nigel Huddleston: “During the election, Labour promised on more than 50 occasions not to increase taxes on working people.
“Do they recognise that working people have pensions too? And therefore can she give those people saving for the future peace of mind by confirming that they will not increase taxes on pensions in the upcoming Budget?”
She responded: “I’m not going to speculate about what will be in the Budget, but I’m absolutely determined to ensure that working people are better off.”
However, she did confirm “investment is at the heart of this Government’s growth mission, alongside stability and reform, with robust fiscal rules and respect for economic institutions”.
She added: “It is vital also that the tax system supports growth, and that’s why today I can confirm that at the Budget the government will be outlining a tax roadmap for business… including our commitment to cap corporation tax at 25 per cent for the duration of this Parliament, and to retain full expensing.”