Chancellor could face backlash if pension tax relief is cut, warns LCP

Lane Clark & Peacock (LCP) warned that the Chancellor could face backlash if she cuts pension tax relief. 

Research found that plans to scrap higher rate pension tax relief, cap the 25% tax-free lump sum, or end salary sacrifice could all trigger political and economic problems. 

LCP said these measures would raise less money than expected, could break manifesto pledges not to increase tax on workers, and hit public sector workers and those on modest earnings the hardest.

Higher rate tax relief and tax-free lump sum cuts would especially affect public sector staff, who are more likely to have generous pensions and long service. 

Scrapping salary sacrifice would mainly hit basic rate taxpayers, with over 3 million people losing out, according to LCP.

This would also increase costs for employers.

LCP added that major changes to tax relief would take years to implement, meaning little extra money would be raised in this Parliament. 

Capping tax-free cash would also mean complex transition rules, so any gains would take time.

Steve Webb, partner at LCP, said: “Raiding pension tax relief may look superficially attractive for a cash-strapped Chancellor. 

“But lying beneath the surface are multiple traps for the unwary, meaning that reforms might raise far less than expected, break manifesto promises to workers or put additional burdens on employers who are already under pressure. 

“The political backlash against such reforms could easily echo previous ‘Omnishambles’ Budgets where a U-turn was made within a matter of weeks.”

Tim Camfield, principal at LCP, said: “Millions of people on modest incomes benefit from various features of the tax relief system, including the ability to sacrifice salary and benefit from a reduced National Insurance bill. 

“If this measure was scrapped, employees paying basic rate tax and trying to do the right thing by saving for their retirement could well be losers, as well as the employers who try to provide good pensions. 

“Any such change could undermine pension saving and confidence in the system and should be avoided.”