The Treasury is drawing up plans for a tax raid on wealthy pensioners as it seeks to repair the nation’s finances after the pandemic.
Officials are working on plans to cut the lifetime allowance, the amount people can build up in their pension pot before incurring punitive charges, from just over £1 million to £900,000.
It would mean that more people face a 25 per cent levy on any additional income from their pension pot. The charge rises to 55 per cent if they choose to draw down a lump sum.
The move is seen as more palatable than plans to cut tax relief for pension contributions by higher-rate taxpayers.
Introducing a flat rate of relief — said to be 25 per cent — could raise an additional £4 billion a year but it is “very complex” and would take years to implement.
“You’d basically need to overhaul the tax system,” a government source said. “It’s not simple.” The source also said that it would be politically toxic. “It would hammer Middle England. Rishi [Sunak] won’t do it.” Any change will not be implemented until the autumn statement, expected in November.
Yesterday the prime minister’s spokesman said that the government was “fully committed” to the triple lock, under which the state pension rises in line with inflation, earnings or 2.5 per cent, whichever is highest.
Strong growth in earnings and inflation has prompted concern that sticking to the guarantee will be problematic and could leave the Treasury facing an additional £4 billion pension bill. The earnings data is artificially high because a year ago wages were depressed, with many people being furloughed. Reports have suggested that the government is toying with the idea of suspending the triple lock for a year or taking a two-year average to help to cut back the rise.
When asked about the possibility of a one-year suspension of the manifesto pledge, the prime minister’s spokesman said: “We are fully committed to the pensions triple lock.”
Boris Johnson was asked about the triple-lock reports during a visit to a laboratory in Hertfordshire yesterday. He said: “I’m reading all sorts of stuff at the moment which I don’t recognise at all about the government’s plans.”
Kwasi Kwarteng, the business secretary, told LBC radio that the matter would be for Sunak, the chancellor, to consider, but added: “I don’t think there is any chance he will change it.” No 10 said that a review later this year would determine the “final figures” used for any pensions uprating.
Asked whether the review could give the Treasury “wiggle room”, Johnson’s spokesman added: “We’re just simply making the point that there is significant uncertainty around the trajectory of average earnings and whether there will be the spike that has been forecasted.” The official denied that rises in income tax could be used instead to pay for the Covid recovery, after heavy borrowing by the government during the pandemic.
“On income tax, we’ve been clear that there was a promise made at the election that we would not raise the rate of income tax and we stand by that,” the prime minister’s spokesman said.