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Re-stacking the deck?

20 October 2017

Philip Hammond is said to be considering restructuring the tax system to make older people pay more.

There is mounting speculation that the chancellor will use his Budget on 22 November to launch a range of new measures to help young savers, funded by cutting tax perks for older, wealthier individuals.

Mr Hammond is believed to be under pressure to deliver a Budget that appeals to younger people, following a flawed election campaign and a party conference that failed to clearly communicate an agenda for helping the next generation.

One idea he is reportedly examining is a reduction in National Insurance contributions for workers in their 20s and 30s, paid for by cutting pension tax relief for higher rate taxpayers.

Speaking on BBC Radio 4’s Today programme, Lord Willetts, the executive chair of the Resolution Foundation, said he would support any tax cut that helps younger people.

“If you are 30 now, you are probably earning less than someone who was aged 30 ten or fifteen years ago. So, anything that rebalances and helps younger people, I would be in favour of,” he said.

Asked whether he was in favour of penalising older people to pay for any such concession, the Tory peer replied: “A lot of older people themselves worry about the financial situation of their children and grandchildren.”

However, former pensions minister Ros Altmann said the potential measure was fraught with danger. “The lesson from the election manifesto is that punishing the old is not a sensible way to attract younger voters, but is a recipe for losing support of older generations,” she said.

Stacking up

Meanwhile, latest figures published by HM Revenue & Customs show that the total cost to the Treasury of tax relief on pension savings passed £50 billion for the first time in the 2015/16 tax year.1

“The pressure on public finances is now so great that there is clearly a need for a more sustainable pension system that works for everyone,” says Ian Price, divisional director at St. James’s Place. “These numbers will only strengthen that view.”

Currently, for every 80p you pay into your pension pot, the government adds 20p in tax relief, boosting it to a total contribution of £1. However, higher earners can claim extra tax relief through their annual tax return, meaning that a £1 contribution can effectively cost them just 60p. Critics argue that this system favours the wealthy minority and fails to provide the necessary incentive to lower earners, many of whom are younger.

Former chancellor George Osborne wanted to replace the tiered system of tax relief with a flat rate, but dropped proposals after they were met with opposition from Conservative backbenches. The measure is believed to be among several that Mr Hammond is now running past fellow Conservative MPs ahead of the Budget in November.

“We could see a flat rate of tax relief introduced, perhaps 25p for every 75p contributed to a pension, which would be a slight improvement for basic rate taxpayers. It could also represent a cost saving for the Treasury,” says Price.

“A flat rate of 33p for every 67p contributed to a pension would provide an even greater incentive to basic rate taxpayers and it would be much more palatable for higher earners, although it is unlikely to generate any significant cost savings for the Exchequer.”

“However, if he is serious about helping young people, then we could see an entirely different system – perhaps one where the tax break is somehow related to the individual’s age.”

Weaker hand

As the chancellor explores his options, he will be acutely aware of the limited ability of the UK economy to generate increased tax revenues. Productivity is weak, the trade deficit is higher than expected and the International Monetary Fund is pessimistic about the outlook for economic growth.

“The chancellor will have to find money from somewhere,” says Price. “He could raise taxes, but that would be deeply unpopular, so cutting the allowances and benefits on retirement savings for the wealthiest seems more likely.”

Any changes to tax allowances and exemptions could be brought in immediately, so higher earners would be wise to consider bringing forward pension contributions.

“If you are a higher rate taxpayer with the available means and allowances, it makes little sense to hold off. You are very unlikely to be in a worse position if you contribute today,” says Price.


The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

1 Personal Pensions Statistics, HM Revenue & Customs, September 2017


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