Radical plans to reform the UK’s tax system between now and 2030 have been published in a new report today.
Commenting on the tax reforms it outlines, Tom Selby, head of retirement policy at AJ Bell, said:
“This is the latest in a long line of think-tank reports backing radical reform of the UK’s tax system. Some of the key proposals, such as drastically lowering the amount of tax-free cash someone is entitled to from the current maximum of £268,275, would likely be unpopular and potentially complex.
“The Resolution Foundation itself acknowledges this, warning there is a risk of any reform [to pensions tax-free cash] being ‘controversial while raising little short-term revenue’. As such, it seems quite unlikely cutting pension tax-free cash entitlements will be a big priority for anyone bidding to be the next Chancellor ahead of the general election.
“However, the decision by Chancellor Jeremy Hunt to abolish the lifetime allowance and move towards a pounds and pence cap on tax free cash, rather than one linked to the lifetime allowance, could open the door for future cuts – possibly by stealth if the £268,275 tax-free cash maximum figure fails to increase in line with inflation.
“Similarly, subjecting pensions to IHT might raise some much-needed cash for the Treasury’s coffers but could also be a vote-loser, particularly among traditional Conservative voters. It would also likely come with transitional challenges, as those who have contributed to a pension on the basis of the current tax treatment on death might argue applying IHT would, in effect, be a retrospective tax hit on their savings.
“Elsewhere, disparities between the rates of tax charged on dividends and capital gains versus income have long been debated in the UK, with the Resolution Foundation backing more consistent taxation of income and wealth. This would imply a rise in both the dividend tax rate and CGT, which in turn should make vehicles like pensions and ISAs – which are free from taxes on dividends and capital gains – more attractive.”
Shifting the way National Insurance applies to pensions
“Shifting the way NI is applied on pensions may have more political appeal, however. As things stand, employer contributions to pensions are free from NI, while employee contributions do not get NI relief – although workers with salary sacrifice arrangements in place can benefit from lower NI.
“The Resolution Foundation proposes reversing this situation, so employer pension contributions are subject to NI and employee contributions are not. This would potentially raise billions of pounds for the Exchequer, although the obvious challenge would be the extra cost it would load onto employers at a time when many firms are already struggling.”