Changes coming in October’s Budget could include a hit on employer pension contributions, according to consultants LCP.
Analysis published today (September 30) by LCP looks at the potential for changes on pension tax relief as part of the Budget on October 30.
It said this area could be a target for the chancellor after she repeated promises not to raise rates of income tax, national insurance, VAT or corporation tax.
The paper considers three areas of the pension system which could be in the sights of Rachel Reeves when the Budget rolls around.
Employer pension contributions
At the moment the cost of not charging national insurance on pension contributions made by employers is around £23.8bn.
The paper said options the government could consider to reduce the cost of this relief include:
- Applying full NI to all employer pension contributions.
- Creating a new (lower) rate of employer NI and applying it to employer pension contributions
- Abolishing ‘salary sacrifice’ for pensions
However it said levying full NI on employer contributions would hugely increase the costs to businesses which could in turn damage the government’s growth objectives.
LCP partner, Steve Webb, said the chancellor will be looking to make changes which can be introduced quickly and raise money with little voter anger.
He said: “Changes to taxes on business may fall within that category, and the large cost of exempting employer pension contributions from national insurance contributions will not have escaped the chancellor’s attention”.
Tax free lump sums
The chancellor could also consider a cap on tax-free lump sums, the paper set out.
While this is an option the chancellor could consider, it could be too complex to be attractive.
Currently the lifetime limit on tax free lump sums is £268,275.
However, LCP said cutting this limit would also need to be accompanied by a complex set of protections and reduce the revenue for government.
Alasdair Mayes, partner at LCP said: “Capping tax-free lump sums sounds simple in theory but would be complex in practice.
“Complex transitional rules would need to be designed for those who would otherwise be unfairly affected by the change, and this could mean it would take months or years to implement.”
Inheriting pension pots on death
Another area the chancellor may consider looking at are the rules which allow people to inherit a pension pot free of income tax when the person who died is under 75.
The government could look at removing this age limit, but is not clear how much money this would raise.
This was another case where the political flak may outweigh any benefits, according to LCP senior consultant, Tim Camfield.
He added: “While it can be argued that reform could encourage the use of pensions for income to the saver and their spouse rather than inheritance, any changes must be weighed carefully to avoid unintended consequences such as penalising unmarried partners.”
tara.o'connor@ft.com
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