UK Think Tank Proposes £9bn Pension Tax Overhaul for Budget

The Resolution Foundation, a prominent British think tank, has proposed a significant overhaul of the UK's pension tax system, potentially raising £9 billion for the Treasury. This suggestion comes as part of a broader set of recommendations for the upcoming Budget, aimed at addressing the government's fiscal challenges.

The core of the proposal involves requiring companies to pay National Insurance (NI) on their contributions to employee pension schemes. Currently, employer contributions are exempt from this tax, which the think tank argues is an "unnecessary" and "arbitrary" relief. Under the proposed changes, employer contributions would be subject to the same 13.8% NI rate as other employment costs.

To balance this change, the Resolution Foundation suggests making employee pension contributions tax-free. This dual approach is estimated to generate £9 billion in additional revenue for the government. However, experts have raised concerns about the potential consequences of such a policy shift.

Steve Webb, a former pensions minister now working at consultancy LCP, warned that taxing employer contributions could discourage companies from supporting their employees' retirement savings. He stated, "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."

The proposal also raises questions about Labour's election pledge not to increase taxes on working people. While the changes would directly affect employers, there are concerns that the costs could ultimately be passed on to employees through reduced wages or pension contributions.

It's worth noting that the UK's pension system, based on three pillars (state pension, workplace pensions, and private pensions), has undergone significant changes in recent years. The introduction of auto-enrollment in 2012 has been credited with substantially increasing the number of people saving for retirement. Any major policy shifts would need to be carefully considered in this context.

The Resolution Foundation's report also includes recommendations for other tax changes, including increases to inheritance tax and capital gains tax. These proposals aim to raise an additional £20 billion for the Treasury, potentially avoiding deep cuts to public services.

In a related development, Baroness Drake, a key figure in past pension reforms, has suggested a "flat rate approach" to pension tax relief. This would potentially affect up to 6 million higher and additional rate taxpayers, aiming to create a more equitable system.

As the UK government grapples with fiscal challenges and the transition to electric vehicles, the Resolution Foundation has also proposed considering road pricing as a replacement for fuel duty revenue. This could involve charging drivers per mile, potentially at a rate of 6p plus VAT.

With the next Budget approaching, these proposals are likely to spark intense debate about the future of UK pension policy and taxation. The government faces the challenge of balancing fiscal responsibility with the need to encourage long-term savings and maintain public support.

"Following the spending audit, the Chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22bn hole the Government has inherited. Decisions on how to do that will be taken at the Budget in the round."

As the UK's state pension age is set to rise to 67 between 2026 and 2028, and with the ongoing impact of pension freedoms introduced in 2015, any changes to the pension tax system will need to be carefully considered within the broader context of retirement policy and long-term economic planning.