Before the former Chancellor of the Exchequer Sajid Javid resigned from his post, he was reportedly considering plans to limit tax relief on pension contributions to 20pc.
Treasury insiders told the Financial Times that cutting pensions tax relief would be revealed at the 11th March Budget in a bid to help fund Boris Johnson’s plan to “level up” the economy.
It remains to be seen whether Rishi Sunak, the UK government’s new Chancellor, will see through Javid’s plans in less than a month’s time. If he does, millions of savers could lose hundreds of thousands of pounds from their pension pots.
All taxpayers would only receive a flat rate of tax relief – the current level offered to basic rate taxpayers. This will be instead of some receiving relief at their marginal rate of income tax of 40pc or 45pc.
Why are pensions being targeted?
The imminent March Budget was always destined to involve tough choices in order to avoid breaking fiscal spending rules, which Javid set out in a speech last November, governing public spending.
Recent pessimistic forecasts from the Bank of England suggest that the Treasury will be left with little room for extra spending or tax cuts next month. This is especially true given Tory manifesto pledges not to increase income tax, national insurance or VAT.
That’s one of the reasons why cutting pensions tax relief, alongside reforms for inheritance tax and entrepreneurs’ relief, are being considered by the government. Sunak must now decide whether he doubles down on taxing the wealthy or come up with a new set of fiscal rules, the latter of which could halt any tax raising initiatives.
“I hope the unexpected reshuffle could buy a bit more time for proper consideration of the impact of any reforms — particularly when it comes to pensions tax relief, which stands to hit anyone earning more than £50,000,” noted Financial Times Personal Finance Editor Claer Barrett.
What could a change to pensions mean for the UK economy
Javid hoped that pension reform would lead to a “fair and efficient” tax system. Although his plan would ease pressure on strained public finances, it would be to the detriment of higher earners.
According to AJ Bell senior analyst Tom Selby, such speculation could adversely affect the UK economy, because savers would “pile into pensions” to make the most of existing tax relief.
“If there are to be reforms to the pension tax framework, they must not risk harming the fragile savings culture that is being developed in the UK,” said Selby. “We believe the focus at the moment should be improving the existing system rather than burning the whole edifice to the ground.”
Given previous attempts to introduce pension reform, Britain’s new Chancellor of the Exchequer will have to think carefully before implementing any changes. George Osbourne had to abandon similar plans in 2016 after the Daily Mail warned that middle class savers “could lose a third of their pensions” through proposed tax changes.