A left-leaning think tank advises Labour to impose a tax on staff pensions, aiming to calm government spending.
- The proposal suggests companies should pay National Insurance on pension contributions, altering current tax relief policies.
- Concerns arise over potential disincentives for employers, possibly reducing generous pension offerings.
- Experts warn of the financial impact on approximately 13.9 million employees benefiting from above-minimum contributions.
- Labour faces the challenge of balancing this proposal with past tax promises and avoiding accusations of raising taxes on working individuals.
The left-leaning think tank proposes that Labour should require businesses to pay National Insurance on contributions made to staff pensions. This initiative challenges the existing tax relief on these contributions, which the think tank describes as “unnecessary” and “arbitrary.”
The recommendations, however, have sparked significant concern among experts. Steve Webb, a former pensions minister, highlighted the risk of discouraging employers from providing generous pension contributions, noting, “We want employers to be generous and pay generously into people’s pensions. The more we tax them for doing that, the less they will do.”
Under the current system, employees must contribute at least 5% of their salary to their workplace pension, while employers contribute a minimum of 3%. Though employees pay National Insurance on their part, companies are exempt.
Resolution Foundation proposes aligning company contributions with the standard 13.8% National Insurance rate, which would affect millions of workers, especially those receiving contributions above the minimum requirement.
Such changes are estimated to generate £9 billion for the Treasury. Critics argue that the new tax could force employers to reduce pension offerings or alter employee compensation to mitigate their increased tax liabilities.
This financial adjustment would significantly impact the approximately 13.9 million employees who currently enjoy the tax-free benefit of contributions exceeding 4% of their pay.
In addition to the pension tax proposal, the think tank also recommends increasing inheritance and capital gains taxes to secure an additional £20 billion, potentially avoiding severe cuts to public services.
Yet, the Labour Party stands at a crossroads, as these measures could lead to allegations of reneging on their election promise not to raise taxes for working individuals.
Amidst these discussions, Baroness Drake has supported a “flat rate” tax relief, potentially impacting up to six million higher and additional rate taxpayers. Such a policy would require high earners to pay more tax on their pension contributions, decreasing the tax advantages for wealthier savers.
Labour must navigate these pension tax proposals carefully to balance fiscal responsibility with electoral commitments.
