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UK. Reeves could raise £10bn a year by reducing pension tax relief, report says

Rachel Reeves could raise at least £10bn a year through a radical shake-up of pensions that would make tax relief less generous to better-off earners, a leading left-of-centre thinktank has said.

The report by the Fabian Society says tax breaks for pensions have become markedly more expensive for the government and its proposed changes would fill half the £22bn shortfall the chancellor has identified in the public finances.

Reeves has dropped strong hints that she is planning a tough, tax-raising budget on 30 October but has said she will not raise income tax, VAT or national insurance.

Andrew Harrop, the general secretary of the Fabians and the author of the report, said Reeves should consider reducing pension tax relief and redistributing it so it is less skewed towards the better-off.

The report says that tax relief on pension contributions was worth £66bn in 2022-23, an increase of 55% since 2016-17. Tax is paid when individuals take their pensions, but this raised only £22bn for HMRC in 2023.

Although upper- and top-rate taxpayers account for 19% of those paying tax, they received an estimated 53% of the tax relief on pensions in 2022-23. Little more than a third of the tax relief (35%) went to women.

Harrop said Reeves had a number of options to make changes – a selection of which would raise at least £10bn a year. These included:

  • Creating a single flat rate of tax relief for individual and employer pension contributions for all tax bands (eg 25p or 30p for each pound of gross income). At the moment, pension tax relief depends on an individual’s marginal tax band.

  • Levy employee national insurance on employer pension contributions in exchange for a higher government top-up on the first £7,500 of annual pension saving.

  • Reduce the maximum tax-free lump sum to the lower of £100,000 or 25% of pension wealth. At present, the tax-free lump sum can be in excess of £250,000.

  • Fairly tax the inheritance of pensions by subjecting pensions to inheritance tax and levying income tax on all inherited pensions.

  • Charge employee national insurance on private pension incomes (with an allowance to exclude small pensions) in exchange for cancelling the forthcoming cut to winter fuel payment.

Harrop said: “Pension tax relief is very expensive and very unequal. It costs the exchequer over £60bn a year and more than half this money goes to higher- and top-rate taxpayers. With huge pressure on the public finances, the UK cannot afford to maintain such a costly and badly targeted system.

“Rachel Reeves needs to raise revenue while also safeguarding family living standards and sticking to Labour’s manifesto pledges. As part of her tax-raising October budget she should introduce reforms to pension tax relief that save money and redistribute taxpayer support from the wealthy to low and middle earners.”

Other options being considered by Reeves are to raise more from capital gains tax and inheritance tax – both of which would hit those on higher incomes the hardest.

 

 

 

Read more @theguardian