Chancellor Rishi Sunak is set to make a series of spending announcements (Wednesday 25 November) as he delivers his one year Spending Review amid the Covid-19 pandemic.
While Sunak has already vowed not to return Britain to austerity, Aegon pension director Steven Cameron warned the Chancellor may use the opportunity to float big changes for pensions tax relief, wealth taxes, income tax and national insurance going forward.
Cameron said: “The Chancellor faces the unenviable task of how to begin recouping the many billions he is spending supporting individuals and businesses through the pandemic and he may use the Spending Review to signal the start of a lengthy period of pandemic payback.
“Just like the virus itself, everyone is likely to be affected but in different ways. There’s no easy remedy, raising the prospects of a range of measures which could have huge and varied implications across generations and earnings levels.”
The pensions industry has faced mounting speculation over the years that the Government might look to boost its coffers by cutting tax relief on pension contributions, with suggestions that Sunak is considering moving to a flat rate of relief at 25%.
However, Cameron warned such a change would be “highly complex to implement”, particularly for defined benefit schemes or those using salary sacrifice to pay their pension contributions.
He explained: “The Government is increasingly focussing on pension funds as a source of investment to support economic recovery, including in infrastructure and the ‘green revolution’. Simply making pensions less attractive for higher rate taxpayers would clash with this, but a balanced approach that offers greater incentives to basic rate taxpayers to put more into their pension could not only boost pension funds but also help more people save adequately for retirement.”
The future of the current pensions triple lock – which guarantees state pensioners an annual increase at the highest of price inflation, earnings growth or 2.5% – has also come under heated debate. While the Government has committed to keeping this in place until at least next April, it could prove too costly over the longer-term, particularly with the prospect of a public sector pay freeze.
Meanwhile Cameron said taxes could potentially take a hit, after the Office of Tax Simplification recently set out proposals for a sharp increase in the rates of Capital Gains Tax or a cut in the annual exemption.
According to Cameron: “Many potentially affected would not consider themselves ‘wealthy’, but reforms of wealth taxes including CGT and inheritance tax would impact far fewer people than an increase in income tax, so can’t be ruled out. Again, those concerned might look to make full use of pension and ISA allowances.”
While the Chancellor is not expected to announce an increase to the headline rate of income tax or national insurance in the short-term, it could be something he reserves for the longer-term, Cameron added.
Social care funding is also likely to make its way on to the Chancellor’s agenda, following calls for the Government to deliver on promised reforms to social care funding.
Cameron added: “We may see additional funds allocated to the care sector in the Spending Review but this is unlikely to be more than a short term sticking plaster. Previous suggestions to create sustainable funding included an increase in income tax or National Insurance, earmarked for social care, and perhaps just for the over 40s. But the Chancellor will now need to undertake a tricky balancing act to assess any such changes against whatever other plans he may have in store.”
However, Cameron said it’s vital that changes to current tax reliefs and incentives “don’t discourage saving for retirement or rainy day emergencies” and said these should be encouraged to provide investments in the economy.
