A huge pension tax change could affect savings for millions of people in retirement, it has been warned, after Labour confirmed it would review the ‘pensions landscape’.
New Chancellor Rachel Reeves has warned of a £20billion hole in public finances which she blamed on ‘unfunded’ tax cuts by the previous Conservative government, which could lead to spending cuts and tax rises.
While the new government has promised to stick to its pledge not to raise income tax, VAT or National Insurance, other tax areas like Capital Gains Tax and pensions may not be off the table.
One such proposal which has been rumoured is a change to pension tax relief, which would swap the current system linked to how much you earn for a flat rate.
Pension contributions are tax deductible and basic rate tax payers – those earning between £12,570 and £50,270 – get a relief on what they put into their pension equal to 20 percent of their payments to remove the income tax that would otherwise be due on it.
For those earning at the higher rate, so more than £50,270, the relief is 40 percent. Finally, additional rate taxpayers earning more than £125,140, the highest band, get 45 per cent relief.
But a flat rate would do away with these income-related bands and swap to 30 percent for everyone.
It would mean that lower earners benefit from 10 percent more relief on their pension, allowing them to save more before paying tax on it, while higher earners, those earning over £50,270, would lose 10 percent of their tax relief and those earning over £125,000 would lose 15 percent.
The plan would raise £2.7Bn in tax revenue according to the Institute of Fiscal Studies.While there is nothing to say Labour will put such a plan into action, experts are worried that such reform could come to pensions in future.
Cabinet Office minister Pat McFadden said Labour’s election promise not to raise income tax, national insurance or VAT would “still hold” ahead of the Chancellor’s statement on Monday afternoon.
Ms Reeves will lay out the spending inheritance left by the previous government – and announce the date of her first autumn Budget – as she pledges to “restore economic stability”.
In the House of Commons, she will say that a Treasury spending audit she commissioned shows that the previous government overspent this year’s budgets by billions of pounds after making a series of unfunded promises.
She will also accuse the previous Conservative administration of “covering up the true state of the public finances”, while cuts and delays to major infrastructure projects are expected.
The Conservatives have sought to suggest Labour is attempting to build a narrative which could lay the ground for future tax rises at its first budget.
“Today is not a budget, people shouldn’t expect tax announcements today,” Mr McFadden told Times Radio.
“We said a number of things about tax during the election, we said that we wouldn’t increase income tax rates, national insurance rates, or VAT. Those things still hold.”
Paul Johnson, the director of the IFS, told the BBC that the £20 billion public spending hole the Government is attempting to plug is roughly equivalent in scale to the cost of the Tories’ pre-election national insurance cuts.
“Now, if those cuts were implemented in the knowledge that there was this kind of hole that is not good policy to put it mildly,” he added.
Shadow transport secretary Helen Whately challenged Labour’s assertions that it would reveal new information about the public purse, as Ms Reeves “would have known about the state of the public finances” while serving in opposition because of the Office for Budget Responsibility.
Ms Whately added: “Actually while Labour is going out there and trying to tell everybody that it is all so difficult for them, this is just them setting a narrative for tax rises that they want to bring in later on.”
