Drastic tax shake-up pushed by Resolution Foundation would raid pensions
Drastic fiscal shake-up spurred by think tanks would plunder pensions but be a boon for wealthy parents: what’s in the plan and will it happen?
- Proposals include reducing tax-free pension amounts for younger generations
- Think tank also proposes to levy inheritance tax on pension pots
- But parents with more than £50,000 would see their child benefit reinstated
A radical tax attack on retirement savings, inheritances and investments is being floated by leading think tanks.
Scrapping tax-free pension lump sum payments for younger generations, levying inheritance tax on pension pots and withdrawing capital gains and dividend tax are among the proposals.
But some unpopular tax measures would also be swept away in the overhaul outlined in the new report from the Resolution Foundation and the Center for Economic Performance.
They want to reinstate child benefit, rather than reduce it or withdraw it altogether for parents earning more than £50,000, and end the phasing out of personal tax deductions for those earning more than £100,000.
Financial plan: Think tanks want pensions to be included in assets being tested for inheritance tax
These measures have left some households with staggeringly high marginal tax rates of more than 80 percent.
The ‘Economy 2030 study’ also proposes removing the burden of paying national insurance on individual savers’ pension contributions and placing it instead on employers.
The Resolution Foundation and CEP say UK tax revenue growth between the years 2000 and 2027-28 will amount to £4,200 per household, an increase from 33 per cent of GDP to almost 38 per cent, or more than £1 trillion.
But they argue that the quantity of taxation has not been matched by an increase in its quality.
“The discrepancy between the rhetoric of tax cuts and the tax-increase realities in the 2010s and 2020s has left no room for a consistent, coherent strategy for the tax system,” the report said.
“U-turns and fiscal bungling have happened too often, and reforms have been sidelined too often. The same taxes have been cut and increased, while well-understood problems with our tax system have been strengthened rather than addressed.”
The full overview of the proposed tax reform in the Economy 2030 Researchfunded by the independent charity The Nuffield Foundation, is below.
“This is the latest in a long line of reports from think tanks supporting radical reforms to the UK tax system.” says Tom Selby, chief of retirement policy at AJ Bell.
“Some of the key proposals, such as drastically reducing the amount of tax-free cash someone is entitled to from the current cap of £268,275, would likely be unpopular and potentially complex.”
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Selby says the Resolution Foundation itself recognizes that there is a risk that reforming tax-exempt pensions would be “controversial and, at the same time, generate little short-term revenue.”
It seems quite unlikely that cutting tax-free pension entitlements will be a major priority for anyone running for the next chancellor ahead of the general election.
However, Chancellor Hunt’s decision to abolish the lifetime allowance and move to a limit in pounds and pence for tax-free cash, rather than a limit linked to the lifetime allowance, could open the door for future cuts – possibly sneaky if the £268,275 tax-free cash cap doesn’t increase with inflation.
“Similarly, subjecting pensions to estate taxes could provide some much-needed cash for the Treasury, but it could also be a loss of vote, especially among traditional conservative voters.”
But Selby notes, ‘However, changing the way National Insurance is applied to pensions could have more political appeal.
“As things stand, employer contributions to pensions are free of NI, while employee contributions do not receive NI relief – although employees with wage sacrifice schemes can benefit from a lower NI.
‘Stichting Resolution proposes to reverse this situation. This could potentially add billions of pounds to the Treasury, although the obvious challenge would be the extra cost it would mean for employers at a time when many businesses are already struggling.”