Pensions  

IFS tells govt to consider pension tax hike to pay off Covid debt

IFS tells govt to consider pension tax hike to pay off Covid debt

The government should consider raising the amount of tax retirees pay on their pension withdrawals to help pay off the UK’s Covid-19 debt, the Institute for Fiscal Studies has said.

Appearing at a Treasury Committee hearing on tax after coronavirus this morning (September 1), Paul Johnson, director at the IFS, said pensioners were a feasible target as they had been protected from past tax rises and have received generous benefits from their pensions.

Mr Johnson said the amount of tax paid on pension withdrawals could be increased marginally to bring in extra revenue, particularly on occupational pensions.

Currently, when people take money from their pension 25 per cent is tax free while the remaining 75 per cent above the personal allowance is charged at the marginal rate of income tax.

He said: “Pension tax relief restrictions have raised money over the last decade but there has been no tax increase on pension in payments. 

“In that sense those who have already reached pension age have been protected from tax rises but there is a case for at least a modest increase in tax on occupational pension in payments given that they would have not had any national insurance paid on this in the past.

“[Current retirees] have been well tax relieved and that generation has done very well out of occupational schemes.”

However, he admitted this would not raise the large amounts of revenue that the government would need.

Another suggestion was to reduce the amount of tax relief for higher earners, which has previously been criticised by the industry.

But Mr Johnson agreed this would disincentivise higher earners from paying into a pension and could instead see them move to Isas or other savings vehicles.

Mr Johnson said the government was likely to look at substantial taxes such as national insurance contributions, income tax and VAT, as this is where two-thirds of tax and the majority of the Revenue's income came from.

He said: “The government will probably want to raise the rates of income tax by a few pence which would bring in a lot of money quickly and easily but without doing any significant economic damage.”

But questions were raised about whether the UK could continue to increase taxes or whether it had reached “a limit”.

Mike Brewer, deputy chief executive and chief economist at think tank the Resolution Foundation, said the UK had not reached a limit and argued many other countries had higher tax rates.

He said: “There is political difficulty with making significant tax rises [..] but we have not reached the limit and there are plenty of areas we could raise taxes without reducing growth rates.”

Meanwhile, Mr Johnson added the chancellor had the capacity to raise taxes but had to be significantly more careful about doing so than was the case in the past.

Chancellor Rishi Sunak is expected to outline a rescue plan in an autumn Budget but tax rises are not expected to come into force until the UK has recovered from the outfall of Covid-19.