After the U.K. Government dropped plans to increase national insurance contributions for the self-employed, Chancellor Philip Hammond is said to be in favour of a cut in the annual pension allowance over a flat rate system as pension tax relief is apparently back on the drawing board.
According to The Times and other news media outlets, Hammond needs to find other ways to raise the £2bn in revenue they would have generated by increasing national insurance contributions or NICs, which would have risen to 10 percent in 2018 and 11 percent in 2019.
Hammond announced his decision to back away from the NICs last week due to accusations by his own Conservative Party members that he was breaking one of the tories key election pledges.
The chancellor, thus, put pensions “at the top of his list” to plug the deficit produced by his decision to turn away from NICs, the Sunday Times reported.
“That’s what is being talked about. What else is there? There isn’t much else. What else can you do? He’s not going to compromise the government’s reputation on fiscal integrity and we’re not going to be borrowing more. That’s very clear,” a source close to Hammond told the newspaper.
One policy being considered is a flat rate of tax relief on pension contributions, likely to be less than 30p in £1, which would mean reducing the annual allowance from £40,000 to either £35,000 or £30,000, and is less likely to look at the lifetime allowance.
Treasury sources explained that moving to a flat rate pension tax relief would be misconstrued as an attack on the middle class despite that higher earners receive greater tax relief on contributions than lower earners.
Aegon pensions director Steven Cameron told a British media outlet that, “In the face of a U-turn on NI, the Chancellor may view pension tax relief as a soft target to balance the government books. Doing so might paper over a crack but risks undermining the country’s long-term savings framework.”
Cameron added: “Barely a week goes by without reports of the increasing strain being placed on our social care system. If there’s limited incentive to save for old age, the government will find that a saving now will be met with bigger costs later as fewer and fewer people are able to meet these costs themselves.”