4 days ago
The Australian pensions tax trap that could come to Britain
Australia's plan to double thousands of pension tax bills could be adopted in Britain, experts fear.
Under new rules put forward by Australia's government, 80,000 savers would be forced to start handing a third of their investment returns to the tax office.
When approached by The Telegraph, the UK Government refused to rule out bringing the policy to Britain – which would add to a series of pension raids on farmers, business owners and grieving families.
Martin Willis, of consultancy Barnett Waddingham, said it would provide the Government with quick access to revenue, while Standard Life's Mike Ambery said all options were 'on the table'.
The move could be seen as a replacement for the abolished lifetime allowance. The tax charge on large pensions was removed by previous chancellor Jeremy Hunt, but Deputy Prime Minister Angela Rayner called for it to be reintroduced in a memo leaked last week.
Australian pension savers must pay 15pc tax on any pension investment returns once their pot exceeds $3m (£1.4m), but the country's Labor Government – led by prime minister Anthony Albanese – is now aiming to double the rate to 30pc.
It would require people to pay even higher amounts of tax on 'paper returns', where they have to physically pay a bill for investment gains they have not received in cash. Any losses are offset against future years, but previous payments are not refunded.
'Quasi-inheritance tax'
The country's previous Labor government tried and failed to make the change in 2023, but the plans look increasingly likely to become law after the party clinched a surprise majority with a landslide election win last month.
The move, which will raise $2.7bn (£1.3bn) in its first year alone, was branded a 'quasi-inheritance tax' by Peter Dutton, the opposition's leader, before the country went to the polls.
Critics have also warned that as many Australians also hold assets like farms and small business in their pension schemes, cashflow shortages might force some owners to sell if they couldn't meet their increased tax bills.
In the UK, pension investment returns are currently tax-free. But the Treasury did not rule out the move and two experts said that it would be considered.
Mr Willis said: 'The Government is definitely looking to Australia and what it's done with its pensions, so they'll definitely look at this. Although the UK government gets to tax pension savings on the way out, this would allow them quicker access to the additional revenue.
'With that said, there are other options that would be more dramatic to reduce tax relief on the way in. I would not be surprised in the coming years to see something done on higher rate tax relief or National Insurance.
'The Government is looking at this because they probably would like to reduce what they're spending on tax relief. It's a lot of money.'
Mr Ambery also said: 'All options are on the table. The UK looks at Australia as one comparison for pension policy, but we do things our own way. It would be logical as part of a changing environment on the pension landscape to consider this as an option.
'Tax relief and wealth distribution are highly emotive, but critical considerations economically and politically.'
UK pensioners already hit by Labour
Savers in the UK have already been left reeling by changes made to pensions during Labour's first year in power.
In her maiden Budget, Rachel Reeves introduced a £1m cap on agricultural property relief and business property relief, meaning inheritance tax will be charged at 20pc on assets over £1m from April next year.
Pensions will also be considered for inheritance tax purposes from 2027, decimating some people's death planning and leaving their grieving families facing tax bills of up to 90pc.
The Government has also confirmed that the upcoming Pension Schemes Bill will give pension funds the power to force funds to invest in British assets, which Conservative MPs described as a 'stealth tax' and an 'extraordinary overreach.'
Experts also fear that millions of pensions could be at risk from the Government's plans to allow firms to raid their own pension funds, with one describing it as a £40bn tax grab.
Last week, HMRC also released research confirming it had examined plans to raid income tax and National Insurance relief on salary sacrifice schemes, costing the average earner more than £500 a year.
A Treasury spokesman said: 'As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus. Changes to tax and spend policy are not the only ways of doing this, and recent GDP statistics show that we are doing that.
'We are committed to keeping taxes for working people as low as possible which is why, at last Autumn's Budget, we protected working people's payslips and kept our promise to not raise the basic, higher or additional rates of Income Tax, employee National Insurance or VAT.'
