Government plans to provide an extra £20.5bn funding for the NHS by 2023/24 could see cuts to pension tax relief put back on the table, a former pensions minister has warned.
Prime Minister Theresa May yesterday (18 June) announced a new five-year NHS funding plan, with money coming partly from the cash the government will no longer spend on the annual membership subscription to the European Union after Britain has left.
The remaining funding will come from taxpayers, which “will also need to contribute a bit more in a fair and balanced way,” the statement said.
The government will listen to views about how to do this and Chancellor Philip Hammond will set out further details in due course, it added.
The overall cost of pension tax relief stood at £38.6bn in 2016 to 2017, according to data from HM Revenue & Customs (HMRC).
According to Sir Steve Webb, director of policy at Royal London and former pensions minister, it is “unlikely that the extra revenue would come from a single, high profile measure like a big increase in income tax rates”.
He told FTAdviser: “Ministers always prefer ‘stealth taxes’, such as salami slicing of pension tax relief, which is why we have seen six cuts in tax relief in the last eight years.
“Whilst the government does not have a majority to get through highly contentious changes to tax relief, it will undoubtedly be looking at whether cuts to things like the annual allowance could be a source of additional revenue.”
The annual allowance is a limit on the amount that can be contributed to pensions each year, while still receiving tax relief, currently set at £40,000.
Changes in allowances
Money Purchase Annual Allowance
Tapered annual allowance
Earnings > £150k
Earnings > £150k
Rachel Vahey, product technical manager at Nucleus, argued further cuts to the lifetime allowance - the maximum amount of money a saver can invest in their pension pot, and benefit from tax relief at their marginal rate, before incurring an additional tax charge of up to 55 per cent – shouldn’t be expected.
She said: “The recent cuts in the lifetime allowance down to £1m in 2016/17 are beginning to be felt.
“A recent freedom of information request showed a 1,000 per cent increase in the lifetime allowance tax charge taken in the last ten years, affecting all different types of pension savers in both private and public pension schemes.”
If the decision is to be more radical and move to a single rate of tax relief, as several think tanks have suggested, “then it’s important any changes are well thought through, and not just a knee-jerk reaction,” Ms Vahey noted.
She said: “These changes need to be simple, so that people understand them. But the biggest challenges are, as always, going to be achieving an uncomplicated transition and fairness for all.
“To introduce a single rate of tax relief may be straightforward for those saving in defined contribution schemes. But it is more complex for those saving those saving in defined benefit schemes, which receive the majority of tax relief.”