Pensions are on the firing line in the Autumn Budget

Tomm Adams, Partner said:

HMRC has just published a report suggesting that the Treasury have pensions in their crosshairs in the Autumn Budget. It explores ways that HMRC could butcher pension salary sacrifice arrangements, or even abolish pension tax relief altogether.

Many of us in the pensions industry who care about the general population’s retirement prospects are appalled at the short-sightedness to raise revenues today at the expense of financial stability tomorrow.

There is a misconception at large that the pensions salary sacrifice is a form of personal income tax break, however it doesn’t provide any more of an income tax break than any other form of managing pensions contributions.

The tax break connected with pensions generally is deferral on money that is locked away for years or decades, which is even then at risk, and there is tax still due on payments on retirement.

There is an employer National Insurance Contribution (NIC) break at 15%, and an employee NIC break for salary sacrifice schemes, which is 2% for higher earners, and 8% for average and lower earners. In my opinion ‘regular’ non-salary sacrifice contributions should also attract such reliefs.

In gross, the UK state pension provides only 21.7% of the average final salary in the UK, and even autoenrollment only boosts that to 41.9%, significantly below global averages. Many other jurisdictions don’t apply social security in this way, and the UK is essentially taxing money that is locked away and at already at risk for most savers.

It would be more transparent to roll the NIC exemption out to all, but this is very unlikely to happen under this government and is not something considered in HMRC’s report. However, removing this advantage would further increase costs for employers, and remove incentives for them to support their employees’ long-term financial wellbeing.

There is a practice of employers ‘donating’ part of their saving to employees to further boost their retirement pot, which is especially relevant to higher earners who don’t get that big a saving from pension reliefs. If that change is made, there will be less pension contributions going in from higher earners as well.

There are many other options instead of attacking pensions to increase revenues with a shorter-term impact, such as unfreezing fuel duties which would add £3bn to the nation’s bottom line. Hopefully, this is just the poorly timed publication of an outdated project, and not an indication of things to come.

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