IFS publishes its proposals for pension tax changes

Ahead of the Budget on March 15, 2023, the Institute for Fiscal Studies has published its Blueprint for a better tax treatment of pensions in which it proposes:

• A cap on tax free cash so that it is available only on the first £400,000 of pension savings, or alternatively removing the tax fee cash element altogether and replacing it with a 6.5 per cent taxable top-up on all pension withdrawals.
• Applying up-front tax relief equivalent to the rate of employee NICs to all individual pension contributions, and gradually moving to a system where pension withdrawals are subject to NICs.
• Applying employer NICs to all employer pension contributions. This would be offset by introducing a new tax credit on all employer contributions, at a rate to be decided by the Government.

The thinking behind these changes takes into account the current tax treatment of pensions, which is “exempt-exempt-taxed”. Essentially, contributions are tax free, as are investment returns, then withdrawals in the form of pension income are taxed. However, NICs are generally subject to more generous treatment and are effectively “exempt-exempt-exempt” throughout the pension process. 

Comment

The IFS believes its proposals are more equitable. However, it remains to be seen whether the Government would be willing to shoulder the political cost of such radical tax changes.

A lesser measure that would be more palatable for the working population, particularly as the Government is encouraging people out of retirement and back to work, is the abolition of the money purchase annual allowance and the reinstatement of annual increases to the lifetime and annual allowances.