A new paper from a Labour-supporting think tank, which has called on Rachel Reeves to make reform of pension tax relief a priority.

What sort of organisation publishes a paper on Bank Holiday Monday calling for the reform of pension tax relief? The answer is ‘a democratically governed socialist society, a Labour affiliate and one of the party’s original founders’ – the Fabian Society.

In a paper entitled ‘Expensive and Unequal’, the Society’s general secretary has called on Rachel Reeves to consider a radical restructuring of the pension tax landscape. None of the proposals are new, but as we head towards the ‘difficult decisions’ of 30 October, they are worth noting. Although, we should make it clear, this isn’t a Government-sanctioned paper. It’s just some ideas put forward by a Labour-supporting think tank:

a) Reform income tax relief on pension contributions

• Create a single flat rate of tax relief for individual pension contributions. The paper is vague about the actual rate, initially giving an example of 30% as midway between 20% and 40%. It then suggests ‘…a lower rate could be set to generate rather than recycle revenue, for example 25%’. The Society’s estimate for tax savings on these two rates are £1.4bn and £5bn, based on applying an estimate from a June 2020 Pension Policy Institute paper to recently published HMRC data for 2022/23. The Institute for Fiscal Studies (IFS) recently calculated that a 30% rate of relief would raise £3bn a year in the long run.
• The same flat rate would apply to employer contributions, which would become taxable income. However, the paper says it would be necessary to ‘consider special arrangements for defined benefit schemes.’
• Rebadge tax relief as ‘a simple top-up credit on pension contributions (e.g. a £1 match for every £3 of contributions after tax)’, echoing the approach for Lifetime ISAs.

b) Consider increasing taxes on pensions in retirement

• Revise the taxation of pension lump sums, for example, by reducing the maximum pension commencement lump sum (PCLS) to the lower of £100,000 or 25% of pension value.
• Charge employee national insurance (NICs) on private pension incomes, with an annual allowance (matching the personal allowance) that would exempt small pensions. The paper says the measure should be introduced instead of means-testing the Winter Fuel Payment, albeit, on its calculation, such a move would have produced £2.5bn extra revenue in 2021/22 against the projected Winter Fuel Payment saving of £1.5bn in 2025/26.
• Make pension assets subject to inheritance tax and levy income tax on all inherited pensions. This echoes a frequent IFS proposal and, on its estimates, would raise about £1.9bn a year in the long term.

c) Consult on reforms to NICs for pension contributions

• The paper gives the example of replacing the current NICs exemption for employer contributions with ‘a clearer cashback scheme that rewards employers only for making voluntary contributions beyond the auto enrolment minimum’.
• It also suggests levying employee NICs on employer contributions, in exchange for a higher flat-rate pension tax credit on the first tranche of annual pension saving (e.g. £1 match for every £2 of contributions after tax on the first £7,500 of contribution).

d) Recycle some of the savings into improving support for under-pensioned groups

• Increase minimum employer contributions under automatic enrolment from 3% to 7% of earnings. On its own this would represent revenue loss to the Treasury due to increased tax relief, but the paper notes that ‘This could easily be absorbed as part of a comprehensive reform package that reduced the overall cost of pension tax relief, largely targeting high earners’. The paper does not put any numbers on this or consider the impact of such an increase on the Government’s economic growth goals.
• Develop a new opt-out pension for the self-employed with tax relief designed to match what employees receive (income tax and NICs). This would add to expenditure, both because of the greater total relief and more encouragement to make pension savings.
• Consider providing pension credits to people out of work because they are caring for young children or disabled people.

The paper says that ‘even if only a sub-set [of its measures] were progressed there would be ample scope to generate £10bn per year in extra tax revenues.’

Comment

Pensions tax relief has been the ‘low-hanging fruit’ of nearly every journalist’s pre-Budget copy for years. 2024 might just be their last opportunity to recycle the story.

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