The new government is set to reveal its first Budget in two weeks’ time. Many expect tax on pensions to change, but which are the options the chancellor is most likely to choose? A panel of experts shared their views at the Pensions and Lifetime Savings Association’s annual conference on Thursday. 

“Raising tax is seen as plucking the goose with the minimum amount of hissing,” said LCP partner and former pensions minister Sir Steve Webb.  

Speaking at a conference panel in Liverpool on Thursday, Sir Steve said that a government looking for revenue will “want something that raises serious amounts” and will want it “sooner rather than later”.  

However, any new measures also need to avoid complex transitions, he observed – yet seemingly simple changes can end up being highly complex to implement. 

“Think about the [lifetime allowance]. What could be simpler than abolishing something?” he remarked, pointing out that HMRC is still in the process of finalising the rules around LTA removal. "If it’s complicated to abolish, think about how complicated it is to bring something in." 

The same complexity and transition arrangements would likely be required if the Treasury were to remove tax-free cash, he suggested. However, such transition protections do mean the government “don’t get the money” soon.  

As one of Labour’s first deeds was to award £9bn of public sector pay increases, he argued any Budget speculation should firstly ask what the impact on public sector workers would be, who are seen as core Labour voters. 

In pensions, that might not leave many options. “A lot of measures have a disproportionate impact on DB members,” he pointed out, as even those on lower incomes can accumulate substantial pension and lump sum entitlements depending on length of service. A change to tax relief on contribution or a reduction in the cap on tax free cash is therefore unlikely, he suggested, leaving national insurance as a soft target. 

 

Levying national insurance on employer contributions at the full rate would raise £13bn to £15bn, he said, but: “I’m not convinced it would come in at the full whack. You could bring it in at 2% or 3%, get yourself a few billion quid, everyone would moan, but at 2% or 3% would anyone change anything? Would an employer who is still saving 10%-odd NI by paying pensions, not wages, get rid of salary sacrifice? Probably not.” 

However, this might not be the end of the story, he suggested. The government might put national insurance on pension contributions up at future Budgets. 

“You could say, a penny on employer NI for everybody, that’s about £9bn, and then a few per cent on contributions, see if nothing happens, and then nudge that up. There you go, two for the price of one,” he predicted.  

Pensions look like they will be in line of fire in two weeks’ time, agreed the former general secretary of socialist thinktank the Fabian Society, Andrew Harrop. 

Given that chancellor Rachel Reeves has ruled out rises in income tax, national insurance and VAT on “working people”, Harrop said this spells “bad news” for pensions. “It does look like the least bad space for her to go to for money.”  

Harrop argued in favour of more radical changes, saying the current system favours people on higher earnings, and that there is a growing imbalance between pensions tax relief and revenues from pensions in payment.  

At the moment most people can expect to get more relief than they pay in tax when they are retired, he said, citing as the most important reasons for this the tax-free lump sum and the exemption of employer contributions from national insurance.  

Tax relief on pension contributions is currently about £66bn, according to Harrop, while revenue from tax on pensions in payment stands at about £22bn. He noted that the former has grown by more than 50% in the past decade, with much relief now going to DC pensions.  

To address this imbalance, Harrop proposed to cap the tax-free lump sum at £100,000, and “moving away from ‘zero-taxing’ pensions” generally, also making pensions subject to inheritance tax. 

"A lot of people worry about double-taxation of pensions. We are so far from this it’s not true,” he said. 
 
A system that is entirely fair might be difficult to achieve, found independent consultant Jackie Wells, as everyone has a slightly different view on fairness. 

Fairness is one of the criteria for pensions tax set out by the PLSA. Others are that changes should be simple to adopt and administer, while also encouraging the right behaviours, and being sustainable and enduring, as well as promoting adequacy. Wells admitted that combining all of these might not be possible.

She said it is “hard to say if any option is fair”, adding: “None of them are simple to adopt.”