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Pensions

Rachel Reeves Eyes Pensions as Next Target for Tax Raid

Strategic Insights

— 2 min read

As Chancellor Rachel Reeves struggles to balance the UK's budget, she is considering targeting retirement pots, a move that could raise £70bn a year in tax revenue. This would be a departure from the current system, where workers pay £12.8bn annually in individual contributions to personal pensions. The taxman currently gives up £46.8bn it would have collected if pension contributions had been subject to income tax, as well as £24bn it would have raised if employer pension contributions had been subject to National Insurance (NI) contributions.

Key Takeaways:

  • The Government offers tax relief worth £70bn every year to encourage workers to save for retirement.
  • The Treasury hands out £70bn of pension tax relief each year, with £46.8bn being foregone income tax and £24bn being lost in NI contributions.
  • Employees currently benefit from roughly £6bn a year in income tax relief through salary sacrifice, with an estimated £3.9bn loss in NI receipts.
  • The Institute for Fiscal Studies (IFS) suggests moving towards levying NI on employer pension contributions, which could boost the Treasury's coffers by over £17bn a year.
  • Restricting income tax relief at a flat rate of 30pc would affect up to 6m higher and additional rate taxpayers, costing the wealthiest savers about £2,600.
  • Reducing the tax-free lump sum to £100,000 would affect about one in five retirees and raise £2bn in the long run, according to the IFS.
  • Employees would bear the brunt of any changes to the pension system, potentially leaving many without the means to support themselves in retirement.

Statistics:

  • £70bn: Annual tax relief offered by the Government to encourage workers to save for retirement
  • £46.8bn: Foregone income tax revenue paid by the Treasury
  • £24bn: NI contributions lost due to employer pension contributions being exempt
  • £6bn: Annual income tax relief through salary sacrifice
  • £3.9bn: Estimated loss in NI receipts due to salary sacrifice schemes
  • £17bn: Potential boost to the Treasury's coffers by levying NI on employer pension contributions
  • £2,600: Potential cost to the wealthiest savers if income tax relief is restricted to 30pc
  • £2bn: Long-run gain from reducing the tax-free lump sum to £100,000
  • £900,000: Pension pot size above which tax relief on additional contributions is essentially free
  • £5.5bn: Annual cost of current tax relief on the tax-free lump sum
  • 37%: Share of income tax relief provided at the basic rate
  • 53%: Share of income tax relief provided at the higher rate
  • 7%: Share of income tax relief provided at the top 45p rate

Sources:

  • Institute for Fiscal Studies (IFS)
  • HMRC
  • Resolution Foundation
  • Fabian Society
  • Treasury spokesman

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