Rachel Reeves is recklessly destroying the British pension

Telegraph

28-05-2025

For a Chancellor of the Exchequer under pressure to increase the Government's tax take without appearing to raise taxes, it looks as if pension schemes may be next in the firing line.
Rachel Reeves faces her first full spending review next month with the public finances in a desperate state; annual interest payments on the national debt are running at more than £100billion and the Labour government has proved incapable of turning the spending taps off.
With pension funds – and pension contributions – seen as an easy target for a Government that has run out of money, HMRC's report this week on the subject of 'salary sacrifice' schemes looks suspiciously well-timed.
Reeves wouldn't be the first Labour Chancellor to squeeze the British private pension sector, which was once the envy of the world. The rot set in when Gordon Brown started taxing pension funds on dividends from their investments, at a cost to those funds of around £10billion a year.
In her autumn statement last year Reeves took a swing at personal pension pots by announcing her decision to end inheritance tax relief on unspent pensions, which previously could be passed on tax free if a saver died before the age of 75.
And pension providers are now being put under pressure by the Government to invest only in British firms, despite the fact that the returns from those investments may be lower as a result, penalising participants by reducing their retirement income.
Salary sacrifice pension schemes, the subject of the HMRC report, are offered to employees by around half of the UK's companies. Pension contributions are deducted from salary free of income tax and national insurance, providing an incentive to the employee to build up a pension and an opportunity for the employer to reduce the cost of NI.
HMRC has taken soundings on the use of such schemes, noting the value to employees and companies, and working out how the withdrawal of the reliefs would affect an individual's net income.
Unsurprisingly the biggest impact is on employees with high salaries. But it's clear that the incentive effect is strongest for those whose income is closest to tax thresholds: the prospect of paying tax at 40 per cent rather than 20 per cent is a powerful reason to sacrifice the top slice of income. For parents threatened with the loss of child benefit if they start moving into higher rate tax, for example, it's a no-brainer.
But to the Treasury such incentives are seen only in terms of a reduced tax stream. The risk that employees will be less likely to build up a pension, or that employers might decide that operating such a scheme is no longer viable, will be of no concern to the Chancellor because it won't show up on this year's balance sheet.
It is of course perfectly logical to offer tax relief on pension contributions: revenue forgone by the Government in the short term will be recouped later when the pension is drawn down as income. But for a Government thinking only about the next set of elections, the temptation to raid pensions now, rather than find any cuts to bloated state expenditure, will probably be too great to resist.
The HMRC report is therefore likely to be seized upon by the Treasury hungry for any scraps to help balance the books. The slow death of the UK's pension industry will be accelerated, but will anyone in this Labour Government notice or care?