Is Rishi Sunak primed to kill off key pension tax breaks

Until November 17, there will be much speculation about what further unpleasant measures the new Sunak government will take to put Britain’s finances back in order. It won’t be a pleasure to read or listen to, that’s for sure. Flashing lights on, headphones on, blinds down.

Give or take the odd billion pounds, there is a £50 billion gap in the nation’s finances that needs to be closed pretty soon. This can only be done in two ways: through government cutbacks or even more creative ways to draw on our wallets (code for higher taxes).

In terms of spending, Chancellor Jeremy Hunt is known to have identified 104 areas where potential cuts could be made. How these will be greeted by the ministers responsible for key government departments remains to be seen, but I can’t imagine there will be no resistance. Some will act more like rottweilers than poodles.

Readers have not been left behind in coming forward with their own suggestions. Overseas aid — currently set at a figure based on 0.5 percent of the country’s gross domestic product — is in the crosshairs of some.

‘The government wallet is a money bank open to the whole world,’ said a regular contributor to my overflowing email inbox, ‘but not to the citizens who work and live in the UK.’ Agree? Disagree? Email me (please).

On the fiscal side – more relevant in terms of the impact on delicate household finances – the rumor mill has started in earnest.

As soon as Rishi Sunak sat down last Wednesday after negotiating (quite skillfully I thought) his first Prime Minister’s questions in the House of Commons, the mill immediately kicked into gear.

In the days leading up to Hunt’s Autumn Statement (mini-Budget) in just under three weeks, I’m sure the grinder gears will be overdrive. Our minds will be brined by rumours, many of them red herring by then. Yes, pickled herring all around.

For many dear readers, there is one important question they want a straight answer to – and the sooner the better.

It’s this: Will pensions be tripled, which dictates that the state pension must rise by 2.5 percent, income or inflation, will be respected – as Liz Truss assured the House during her last PMQs, only to then quickly fall dramatically into her own. fall sword?

So far, Sunak and his phalanx of officials have refused to confirm whether Truss’ promise still stands. It seems that everything – including a range of other promises – is now up for discussion and discussion.

I think it would be political suicide for Sunak and Hunt to renounce the triple pension scheme. In his previous guise as finance minister, Sunak tore up the triple-lock promise – indeed, this time last year, though it was done with a measure of justification given the revenue uptick as the country’s workforce emerged from lockdown. came and widespread leave.

As a result, instead of the eight percent plus raise that retirees would have received if the pay peg had not been suspended, retirees received a 3.1 percent increase (based on inflation) from April this year. It meant that the basic pension for those who reached state pension age before 6 April 2016 was increased to £141.85 a week – while the full rate of the new state pension rose to £185.15.

This time, the argument for breaking the triple lock does not hold. Retirees’ finances have been devastated by inflation. Their state pension deserves to be inflation-proof with a corresponding 10 percent increase from April next year.

It is an opinion shared by Baroness Ros Altmann, a longstanding champion of the elderly. She says it would be “unacceptable” for retirees to be betrayed for the second year in a row. The government, she says, must “keep its word” and pay.

So what will it bring if the triple pension slot is honored?

There could be an extension of the personal deduction freeze (£12,570) and thresholds for both higher (40 per cent) and additional (45 per cent) rate tax (£50,270 and £150,000) – from tax year 2025 to tax year 2027. This would dragging three million workers into a higher tax bracket – bringing more tax revenue to the government’s coffers.

Another option – which has so far escaped the rumor mill – is for Sunak and Hunt to limit the tax credit high earners enjoy on pension contributions.

If you are currently a base rate taxpayer and contribute £100 of your salary to your pension, it will only cost you £80. This is because the government adds the extra £20 on top – which it would have earned in income tax. But higher and extra rate taxpayers only need to pay £60 and £55 respectively to achieve the same £100 in retirement savings.

Some experts believe, with some justification, that the current system of tax relief for pensions favors the wealthy. The most recent data supports this argument. About 58 per cent of the £44bn annual tax credit provided by the government on pension contributions goes into taxpayers’ pension pots with a higher and additional rate. To put this into context, the UK has 34 million taxpayers, of which 5.5 million are higher or higher rate taxpayers.

In 2015, the then Chancellor, George Osborne, wanted to review the tax credit on pension contributions and hold a consultation on its future. Numerous radical options were considered, including a lump-sum relief for all, but Osborne lost his nerve, fearing a reaction from Tory supporters ahead of the Brexit referendum vote in June 2016.

So, could Sunak and Hunt go where Osborne feared to tread? Could they close much of the public finance gap by curtailing the tax cut on pension contributions?

Ros Altmann says she is “certain” that such an option is up for discussion, though she adds that it depends on how brave the prime minister and chancellor are to determine whether it goes beyond just table talks.

Abolishing higher rate cuts will not be a vote winner for most Conservative supporters, although it could appeal to Labor voters. After all, applying a flat-rate tax credit to pension contributions is the kind of measure a Starmer government would want to implement.

Jason Hollands, director of Bestinvest – part of asset manager Evelyn Partners – is more blue than red when it comes to his politics. So when he says the tax credit for higher pensions is “the cat with nine lives whose luck is about to finally run out,” you wonder if change is on the way.

On Friday, Hollands told me: ‘The cost of the pension tax credit is huge and has increased significantly because employees are automatically enrolled in occupational pensions.

Private sector participation in occupational pensions up from 42 percent in 2012 [when auto-enrolment was introduced] to 86 percent today. But the lion’s share of the tax relief still goes to higher incomes.’

Would there be a furore about the limitation of the pension deduction?

Hollands thinks not. He says many taxpayers feel that higher retirement taxes have been in the “last chance saloon” for years.

So, would the loss of generous tax credits on pension contributions from well-paid savers be a price worth paying if it helps maintain the country’s finances?

Or would it send the wrong message – that the new government isn’t passionate about encouraging us to save for retirement so we don’t become a burden to the state in old age?

I’d love to hear your thoughts – especially since powerful trade associations have just come together to launch the ‘Pension Attention’ campaign – which should encourage all of us to give our pensions a little more TLC (tender loving care).

Extraordinary times.