Rachel Reeves is being urged by the Resolution Foundation to implement a £9bn tax on pension contributions in the upcoming Budget to address rising government spending.
The left-leaning think tank recommends that companies should be required to pay National Insurance on contributions made to staff pension schemes, arguing that the current tax relief is unnecessary and arbitrary. This proposal, however, has raised concerns among experts who warn it could disincentivise employers from contributing to staff pensions. Steve Webb, former pensions minister and current partner at consultancy LCP, cautioned: “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 current rules, employees must contribute a minimum of 5% of their salary to a workplace pension, while employers pay at least 3%. Although employees pay National Insurance on their contributions, companies are exempt. The Resolution Foundation suggests aligning the tax treatment of company contributions with the 13.8% rate applied to other employer National Insurance contributions. The proposed changes would affect millions of workers, particularly those receiving contributions above the minimum rate.
Many companies currently offer matching schemes, with around 13.9 million employees benefiting from contributions exceeding 4% of their pay—a significant tax-free benefit. Critics argue that implementing this tax could lead employers to reduce their pension offerings or adjust compensation to offset the increased tax burden.
The think tank estimates that these changes could generate £9bn for the Treasury, and also recommends raising inheritance tax and capital gains tax to secure an additional £20bn, helping avoid severe public service cuts. However, adopting such measures could expose Labour to accusations of breaking its election pledge not to raise taxes on working people.
The Resolution Foundation’s suggestion comes amidst broader discussions within Labour about pension tax reform. Baroness Drake, a prominent figure in Labour’s past pension reforms, has advocated for a “flat rate” tax relief approach, which could affect up to six million higher and additional rate taxpayers. This policy shift would see high earners paying more tax on their pension contributions, potentially reducing the tax advantages enjoyed by wealthier savers.
The proposed pension tax reform by the Resolution Foundation has sparked significant debate, highlighting the complexity and sensitivity of adjusting financial policies that impact both employers and employees. While the aim is to generate essential revenue for the Treasury, the repercussions on employer contributions and overall pension benefits cannot be overlooked.