A left-leaning think tank has proposed taxing staff pensions as a strategy to curb government spending.
- Experts warn that this could discourage employers from contributing to staff pensions, affecting millions of workers.
- The proposal suggests employers pay National Insurance on pension contributions, potentially raising £9bn.
- Critics argue it might lead to reduced pension offerings and adjustments in compensation strategies.
- There is debate about the impact on Labour’s pledges and broader discussions on pension tax reform.
A left-leaning think tank has recommended imposing a tax on staff pensions to control government spending. This proposal suggests that companies should be required to pay National Insurance contributions on amounts paid into staff pension schemes. The current tax relief on these contributions is described as “unnecessary” and “arbitrary,” sparking debates about its necessity.
Experts, however, express concerns that such a tax could disincentivise employers from contributing to employee pensions. Steve Webb, a former pensions minister, argues that increasing taxes on employers could lead to less generous pension contributions. Under current regulations, employees contribute a minimum of 5% of their salary to workplace pensions, while employers must pay at least 3%. Currently, employees pay National Insurance on their contributions, but companies are exempt.
The Resolution Foundation’s proposal to align the tax on company contributions with the 13.8% rate applied to other employer National Insurance contributions could significantly impact millions of workers, especially those receiving contributions above the minimum rate. Many companies offer matching schemes, benefiting approximately 13.9 million employees who enjoy contributions exceeding 4% of their pay. Critics argue that such tax changes could encourage employers to lower their pension offerings or adjust compensation packages to counterbalance the increased tax burden.
The think tank estimates that this taxation could generate £9bn for the Treasury, while also suggesting increases in inheritance and capital gains taxes to raise an additional £20bn. This approach seeks to avoid severe cuts to public services. However, Labour faces potential challenges for adopting these measures, as it could contradict their election pledge not to raise taxes on working people.
In the broader context of pension tax reform discussions within Labour, Baroness Drake has advocated for a “flat rate” tax relief approach. This reform could affect up to six million higher and additional rate taxpayers by increasing the tax liability on their pension contributions, thus reducing the tax advantages currently enjoyed by wealthier individuals.
The proposed pension tax reform by the think tank raises significant considerations, balancing financial strategy against potential impacts on employment benefits.
