Yahoo News PM could curb pension tax relief to help plug budget black hole, says senior economist
A senior economist has suggested the government should look at curbing pension tax relief to raise tens of billions to help plug the black hole in the UK's finances.
Rishi Sunak and Jeremy Hunt are understood to be considering a number of tax rises and spending cuts ahead of the chancellor's Autumn statement, with the Resolution Foundation think tank warning that £40bn of savings are needed to meet the government's fiscal targets.
The pair warned of decisions on spending of "eye-watering difficulty" in the aftermath of COVID and Liz Truss's disastrous mini-budget.
Read more: Sunak refuses to commit to lifting benefits and pensions in line with inflation
Professor Jill Rutter, fellow at the Institute for Government, has told Yahoo News UK the government should consider reviewing pension tax relief to help tackle the funding gap.
When someone pays into their retirement pot from their salary, pension tax relief means that money that would have been paid as income tax is added to the pension total instead of going to the government. The tax relief is paid at the highest rate of income tax a person pays.
For example, if a person who qualifies for the highest rate of income tax (45% for earnings over £150,000 per year) were to contribute £100 to their pension, it will actually cost them £55 - because the government will top it up by 45%.
According to figures from HMRC, the government loses tens of billions a year in tax revenue through pension tax relief.
"The government loses a lot of revenue, particularly from high rate taxpayers, through pension tax relief," said Rutter.
"One of the ideas for reforming it is that you restrict it to the basic rate, because it's quite a big amount of money.”
In 2020/21, 58% of the £44.1bn in annual pension tax relief went to people who earn £50,000 or more.
Read more: Vulnerable people missing out on cost of living help as they're 'scared to open post'
In addition, Professor Jill Rutter said the government could look at reforming National Insurance contributions (NICs) to remove the exemption people get when they hit pension age.
“It’s been quite widely suggested for quite some time… [to help with] paying for social care," said Rutter.
"That one of the ways you could do it, not least because older people are obviously the biggest beneficiaries [of social care].”
Abolishing the NICs exemption could raise over £20bn a year for the Treasury.
Rutter's remarks come after reports the government is expecting everyone to pay more taxes, with Hunt said to be considering an approach of 50% tax hikes and 50% spending cuts.
The chancellor and the prime minister are also refusing to reiterate their commitment to increase state pensions and benefits in line with inflation.
During prime minister's questions on Wednesday, Sunak said it “would not be right to comment on individual policy measures” before the autumn statement.
“I think everyone knows we do face a challenging economic outlook and difficult decisions will need to be made," he said.
“What I would say is that we will always, as my track record as chancellor demonstrates, have fairness and compassion at the heart of everything we do.”
Olivier de Schutter, the UN rapporteur on extreme poverty, told the Guardian on Wednesday he was “extremely troubled” by reports the government is considering multibillion-pound spending cuts - including reneging on promising to uprate benefits with inflation.
“This is the worst time to impose such cuts," said Schutter.
"You do not impose austerity measures when the whole population is facing a cost of living crisis. What you do is you raise taxes on the rich, you raise taxes on corporations.”
How does pension tax relief work?
When you pay into a private pension, some of the tax you pay on your income goes towards your pension
For example, if you’re on the basic rate of tax (20%) and you pay £100 into your pension, it only costs you £80 because the government tops it up by 20%
If you’re on the higher rate of tax (40%) and you pay £100 into your pension, it only costs you £60 because the government tops it up by 40%
If you pay the higher rate and additional rate (45%) and you pay in £100 into your pension, it only costs £55 because the government tops it up by 45%
You can receive pension relief for up £40,000 per year
Watch: Rishi Sunak and Jeremy Hunt eyeing 'rough' tax rises across the board to help plug fiscal 'black hole'
