LCP Report Findings

According to a report by pensions consultancy LCP, UK chancellor Rachel Reeves is unlikely to target pension tax relief for higher earners in the upcoming Budget. The report argues that such a move could affect well-compensated public sector workers like teachers and doctors, a group the government may not wish to alienate.

Reeves' Changing Stance

Reeves, who previously advocated for a flat rate of pension tax relief as an opposition MP, is expected to take a different approach now in government. LCP's report points out that cutting pension tax relief could impact a large portion of mid- to senior-level public sector staff, making it politically sensitive. Sir Steve Webb, a former pensions minister and LCP partner, emphasized that Reeves is likely to avoid this option due to the potential fallout.

The Cost of Pension Tax Relief

With the Treasury estimating the annual cost of pension tax relief at around £48bn, the report notes that Reeves is likely still interested in the issue, though reforms in this area come with significant political challenges.

Current System and Past Reform Attempts

Currently, both individual and employer pension contributions are tax-exempt up to a certain limit, and withdrawals are taxed as income. The idea of reforming this system has been floated before, notably by George Osborne in 2016, but it was dropped after resistance from Tory MPs.

Alternative Revenue-Raising Options

Instead of cutting pension tax relief, LCP suggests Reeves may explore levying a National Insurance (NI) contribution on employer pension contributions. The consultancy highlights that exempting these contributions costs the Treasury £23.8bn a year and incentivizes salary sacrifice schemes to reduce NI bills. Implementing a small NI rate on employer pension contributions, such as 2%, could raise billions with less political backlash, as it would have little immediate effect on voters' pay packets.

Reeves' Previous Proposals

In the past, Reeves proposed setting a flat rate of pension tax relief at 33%, aimed at providing a boost to basic-rate taxpayers while reducing benefits for higher earners. However, it seems that in her current role, she may lean towards simpler, less controversial changes to raise revenue.

Looking Ahead to the Budget

As the Budget approaches, it remains to be seen whether Reeves will follow through with any pension tax relief reforms. Meanwhile, the Labour manifesto has committed to not raising National Insurance, income tax, or VAT for working people, signaling that the chancellor will need to make some tough decisions in other areas.

The Treasury has declined to comment on potential tax changes ahead of the Budget.