Labour is reportedly set to scrap a controversial plan to slash pension savings tax relief, amid fears it could unfairly target around a million public sector workers, including teachers and nurses.
Treasury officials have reportedly warned Rachel Reeves about cutting the 40 percent tax relief for high earners, pointing out that it might disproportionately affect those with moderate incomes serving in essential public roles, the Times reports.
There are suggestions that a nurse on a £50,000 salary could face an additional £1,000 in taxes annually.
The government is also reportedly re-evaluating a lifetime limit on pension contributions, amid concerns about potential adverse effects on junior doctors.
“The government will take into account the impact on public sector workers,” a government spokesperson told the Times.
The Institute for Fiscal Studies, an economic think tank, has suggested that Chancellor Rachel Reeves could also be considering closing inheritance tax loopholes, potentially netting the Treasury a tidy £4 billion, the paper reports. While government heavyweights are resisting changes to pension tax relief rates, they’re reportedly exploring other avenues to extract additional funds from pension adjustments.
Steve Webb, former pensions minister now with LCP, highlights the dilemma as those fortunate enough to have generous defined benefit pensions in the public sector receive a better deal than those in the private sector.
The Institute for Fiscal Studies (IFS) has found that employer contributions to certain pension pots are a staggering 23.7% of wages. Steve Webb, former pensions minister, issued a stark caution that should the anticipated changes take effect, public sector workers could face an additional 20% tax on this slice of their salary, potentially leaving them hundreds of pounds worse off annually.
Pondering the implications of such a policy shift, Webb expressed his doubts: “I don’t think this is something that Reeves will want to do, not least because it will infuriate public sector unions just weeks after the government agreed pay settlements with them.”
Trade unions have allegedly alerted the Treasury that any such action might be perceived as Reeves “taking back” the recently secured pay increases for public sector staff. Dr. Vishal Sharma, chair of the BMA pensions committee, underscored the significance of recent developments, but warned the Times: “Attacking our pensions in this way would completely reverse this progress by once again taking money away from doctors in a different way. Not only would this negate the recent hard-won pay rises but it would likely reignite the recent pay disputes that have been seen across the NHS.”
The problem extends beyond the public sector, with private sector employees also facing financial strain. David Sturrock, a senior research economist at the Institute for Fiscal Studies (IFS), warned the paper of the repercussions of increased taxes on pension contributions, which could result in what he terms double taxation.
In that scenario, people people may only get 20 per cent tax relief on the amount of money they put into their pension – but pay 40 per cent tax on what they take out.
In response to enquiries, a Treasury spokesperson said: “We do not comment on budget speculation.”
