As the chancellor searches for additional sources of tax revenue, given the parlous state of the economy and the government’s finances, there has been much pre-budget speculation that she may find it by cutting back on pension tax relief.
But new analysis from pensions consultancy LCP finds that although the chancellor may think that pension tax relief represents ‘low hanging fruit’, she could find out that it turns out to have a bitter after-taste: politically and economically.
The analysis concludes that a budget decision to cut pension tax relief could bring back memories of the 2012 ‘Omnishambles’ Budget where high profile measures created a storm of opposition and had to be watered down within weeks.
The new report: How to avoid an Omnishambles Budget, looks at areas typically highlighted as potential areas for treasury savings.
These are: one, getting rid of the higher rates of tax relief enjoyed by those who pay tax above the basic rate and two, capping, or even scrapping, the ability to take 25% of a pension as a tax-free lump sum.
In addition, following publication this year of HMRC research exploring employer attitudes to potential cuts in ‘salary sacrifice’ for pensions, the report also looks at the scope for capping or scrapping this element of the system.
The report then identifies five potential ‘traps for the unwary,’ which could be associated with some or all of these changes.
These are: one, breaking the manifesto commitment not to increase tax on ‘workers’, two hitting the public sector especially hard at a time of fragile industrial relations, three, not raising meaningful money in this parliament, because of the time taken to implement change or because of the need for extensive protection for losers.
Four, putting extra burdens on employers, coming on top of the £25bn hike in employer national insurance contributions in the last budget, and five, undermining pension saving, at a time when even the government estimates that around 14 million workers are not saving enough for a decent retirement.
“Raiding pension tax relief may look superficially attractive for a cash-strapped Chancellor. But lying beneath the surface are multiple traps for the unwary, meaning that reforms might raise far less than expected, break manifesto promises to workers or put additional burdens on employers who are already under pressure,” said Steve Webb, the report co-author and partner at LCP. “The political backlash against such reforms could easily echo previous Omnishambles Budgets where a u-turn was made within a matter of weeks.”
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