Restrictions would force employers to make higher contributions to make up the difference, says expert
Employer contributions to pension pots could soon be taxed, an expert has suggested, in the wake of documents published by the Treasury this week.
Aconsultation paper released alongside the Autumn Statement said tax relief on pension contributions cost almost £50bn in 2014-15.
The document – which was seeking views on plans to further restrict tax relief on payments into defined contribution schemes that have already been accessed – said the cost of pensions tax relief was set to rise.
It added: “The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources focus where there is most need.”
Tom McPhail, head of pensions research at investment specialists Hargreaves Lansdown, told People Management:“This sends a clear signal that tax relief is expensive and will go up.
“You join the dots and the message is one of impending further reform. The Treasury has said it has no current plans to make these reforms, and I accept that on face value, but I also still think it is only a matter of time. It would not surprise me to see something on this next year.”
Employers and employees can currently effectively make pension contributions without paying anything to the taxman. But McPhail said the government may look to put a cap on such relief.
“The government could abolish higher-rate tax relief or restructure the way the relief works,” he said. “Billions of pounds could be saved by the Treasury – it is not insignificant.”
Such restrictions in tax relief could force employers to make higher contributions to ensure they sufficiently fund their retirement liabilities.
“Employers may have to pay more of their profits into pensions to make up the difference,” said McPhail. “It would be that or people having smaller retirement incomes, and it may be a bit of both.”
The consultation came alongside measures outlined by chancellor Philip Hammond in the main Autumn Statement to remove tax relief on various salary sacrifice schemes.
The consultation document said: “The cost of tax and national insurance contributions relief on pension savings is one of the most expensive sets of relief offered by the government.
“As more people become pension savers for the first time, and as automatic enrolment contribution rates increase, the cost of income tax and national insurance contributions relief will increase.”
Meanwhile, Hammond hinted in hisAutumn Statement speech to parliament that certain contractors in the growing gig economy could face higher taxes.
He was speaking after the Office for Budget Responsibility (OBR) warned that the number of new companies set up in the UK was likely to rise at a rate of 5 per cent per year, resulting ina forecast net loss to the taxman of about £3.5bn in 2021-22.
“Technological progress is changing the way people live, and the way they work,” Hammond said. “The tax system needs to keep pace. For example, the OBR has today highlighted the growing cost to the Exchequer of incorporation.
“So the government will consider how we can ensure that the taxation of different ways of working is fair between different individuals, and sustains the tax base as the economy undergoes rapid change.
“We will consult in due course on any proposed changes.”
The Treasury told the Financial Times: “The chancellor did not announce any further changes to pensions tax relief in the Autumn Statement and has no plans to do so.”
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