Pensions may be the target of Rachel Reeves’ November Budget as experts warn that the move could backfire badly. A newly published report says the move would risk becoming a political “Omnishambles” if the Chancellor reduces pension tax relief in her fiscal statement. Pension consultancy firm LCP has cautioned that, despite the tax raid looking like an attractive revenue source for Ms Reeves, it may put additional pressure on employers who are already facing mounting challenges.
Steve Webb, co-author of the new report and partner at LCP said: “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.”
The report, titled ‘How to avoid an Omnishambles Budget’, identified the pitfalls of the potential targets for Treasury savings. These include eliminating enhanced tax relief for higher-rate taxpayers, restricting or removing the 25% tax-free lump sum entitlement, and curtailing salary sacrifice arrangements.
However, the analysis has highlighted the issues with these areas, which includes breaking manifesto promises of not increasing taxes on workers, unfairly affecting public sector employees during negotiations, not generating substantial revenue, imposing additional costs on businesses and discouraging retirement savings.
Mr Webb warned: “The political backlash against such reforms could easily echo previous Omnishambles Budgets where a U-turn was made within a matter of weeks.”
The experts say that the elimination of salary sacrifice schemes would be most impactful to the ordinary worker, as this currently allows for employees to decrease their NI contributions by putting their pay into pensions.
According to the report, up to three million basic-rate taxpayers would face higher costs.
Tim Camfield, report co-author and principal at LCP said: “Millions of people on modest incomes benefit from various features of the tax relief system, including the ability to sacrifice salary and benefit from a reduced National Insurance bill.”
Ms Reeves has pledged to not raise income tax, VAT or National Insurance, meaning pensions may be a “low hanging fruit” to raise cash.
“Any such change could undermine pension saving and confidence in the system and should be avoided,” Mr Camfield adds.