With the pressure mounting, Jon Greer, head of retirement policy at Old Mutual Wealth, looks at how the Chancellor could fill his purse using pension tax relief, or curbing national insurance contributions and the impacts of such moves.
The prospect of a tax-raid on pensions was floated under George Osborne. But earlier this summer David Gauke ruled out ‘fundamental’ reforms to the system. This offered some re-assurance to savers, but ultimate authority for pension taxation sits with the Treasury rather than the Department for Work and Pensions.
According to the latest data, the cost of pension tax relief now totals close to £54bn annually. This includes both income tax relief and employer national insurance exemptions. That is a huge investment in our future prosperity, and we hope the Chancellor will recognise the long-term value it delivers in helping workers achieve a saving pot that will deliver a prosperous retirement.
Nonetheless, with limited wiggle-room in the upcoming Budget there are still lingering concerns that the Chancellor may chip away at the tax break. This seems unlikely to take the form of an overhaul of income tax relief on pension contributions, which would be a major risk.
However, the government could further reduce the annual allowance on contributions. It has already tumbled from around £250,000 as a recently as 2010, but curbing it further would allow government to restrict contributions from higher earners. Savers affected by such a measure would be able to use the £40,000 annual allowance for this tax year, and any unused allowance from the past three years, known as ‘carry-forward’.
A more radical option would be to curb the employer national insurance exemption. This costs around £15bn a year on latest estimates, but will continue to go up as minimum contribution rates under auto-enrolment increase in 2018 and 2019. Cutting this relief would heap additional cost on corporates, by stripping away the relief they get on NI of up to 13.8% when paid into a staff pension. But it would reduce the cost of pension tax relief without hitting employees directly.
Before implementing such a radical option, Hammond needs to think about the impact on businesses in the UK. The Conservatives have already promised that the UK is open for business, a promise of particular importance as Brexit negotiations tick along.