Following a £3bn increase in the cost of pension tax relief, the Chancellor is poised to take another bite from the pensions pie, Steve Webb has warned.
The former pensions minister, turned Royal London director of policy, said it was likely Chancellor Philip Hammond would introduce additional cuts to the annual allowance at next week’s Budget.
HMRC figures released last week showed pension tax relief cost the Treasury £3bn more in 2015-16 than in the year before, with the total figure growing from £21.8bn in 2014-15 to £24.8bn last year.
Webb (pictured) thought these figures could persuade the ‘cash-strapped’ Chancellor there was more money to be taken from pension tax relief, despite already making cuts in last year’s Autumn Statement.
“The Treasury might have been thinking ‘we can’t fish in that pond again, we can’t go more for pension tax relief because we’ve already cut it several times and are close to the bone'”, Webb said.
“But what these figures are saying is that there’s billions and billions of pounds being spent on pension tax relief, therefore this increases the risk that a Chancellor who has spending pressures on one side, and is quite constrained on where he can find revenue on the other, might go back for another bite,” he added.
Webb felt it most likely the government would use any such savings generated to fund the likes of social care, disability benefits and education.
“I suspect they have a long shopping list of spending pressures. The government is broke – where are they going to look,” the former pensions minister added.
Raft of cutsThere have already been a number of cuts made to pension tax allowances in recent years. In 2010, the annual allowance was cut from £255,000 to £50,000. Then, in 2012, it was cut by a further £10,000, bringing the total to £40,000.
Finally, last year a taper was introduced, meaning those with an income of £150,000 or more face a reduction of £1 from their annual allowance for every £2 earned.
As it stands, the maximum reduction is £30,000, so those with an annual income of more than £210,000 will have an annual allowance of just £10,000.
KPMG pensions partner David Fairs echoed these thoughts. “We know that the government is continuing to eye further changes to the tax regime for pension schemes,” he said.
“However, what we don’t know is whether this will involve sweeping changes – along the lines of the pensions ISA mooted in the 2015 Treasury green paper – or just tinkering with existing allowances”.