Following pressure from within the Conservative party, it has been revealed that George Osborne will be scrapping plans to reform the pension tax relief system in a way that would have affected high-earning Tory voters.
Initial proposals included changing the way tax relief is offered on pension savings from a system whereby the level of relief is scaled in accordance with income tax rates to a flat rate system. This would have meant that those on basic rate income tax would get more tax relief, while higher earners would have lost out. Another proposal was to create a ‘pensions ISA’ that would have reversed the way in which tax is worked out for pensions altogether.
The potential impact of the changes on a large demographic of Tory voters led to scepticism within the party and it has now emerged that due to this pressure, no such reforms will be announced in this next Budget in March.
A source close to the Chancellor said: “There won’t be any changes to tax relief at all in the budget. George has always been clear he wouldn’t do anything to damage savings. The pensions consultation has been open-ended, to look as how the system is working. He’s listened to what people have said and concluded that now isn’t the right time – with uncertainty in the global economy and reforms such as auto-enrolment still bedding in – to turn things on their head.”
It has been thought that the tentative nature of support for Cameron’s campaign to remain in the EU was affecting Osborne’s decision, after we was warned of potential “riot” and “explosion” from within the party should he decide to go through with his reforms.
Mark Garnier of the Treasury Select Committee said that “two big things going on at the same time doesn’t necessarily help the arguments of either one or the other.”
However, he stopped short of claiming that the resultant pressure on Osborne was anything to do with him being held at ransom over the EU referendum, instead saying that “it’s more to do with the fact that during this consultation a lot of companies have come forward and said this type of flat rate contribution is quite difficult to administer, when you look at payrolls and how you deliver it.”
He went on: “it’s clearly not an insurmountable problem, but I think there is a great deal of complaint amongst smaller business, we’ve got auto-enrolment, and if you then add on to it a payroll issue that becomes a bit more of a problem.”
Mick McAteer, however, the director of the Financial Inclusion Centre, claimed that Osborne’s proposed reforms would have been a necessary step towards tackling pension inequality.
He said: “UK households have around £4.8tn-worth of private pension wealth, the top 20% of those households own about £3.4tn of that wealth, so if you have 10 people in a room, two of those people have more than twice the pension wealth than the other eight put together.
“We have a clear inequality in our pensions system, and this is a really disappointing piece of news, because this was a great opportunity to actually make the pensions system work better for the self-employed, people on zero-hours contracts who are really facing a long-term pensions crisis. Fewer than one in five of the self-employed are currently contributing to a pension at the moment, that’s down from a figure of 60% back in the late 1990s.”
Labour shadow chancellor John McDonnell also weighed in, saying that Osborne is “yet again ducking a big decision and putting the interests of his part ahead of those of our country.”
In a general sense, Osborne will be cautious about making any particularly radical changes that risk alienating voters given his desire to succeed David Cameron as prime minister. If he loses the support of a core section of Tory supporters, he is unlikely to retain support from the party’s back bench.
McDonnell accused Osborne directly of placing this particular political motive over and above the general good, saying “this decision suggest George Osborne is only interested in securing the future leadership of his party.”
Osborne said in a recent BBC interview that a large part of the focus of this next budget will be on making sure that our domestic economy stays safe and secure in the midst of global turmoil.
“People should know this of me,” he said, “I will do what is required to keep our country safe and secure.”
There have been hints that, now that pension tax relief reform is out of the window, Osborne may speed up the increase of the bracket for higher rate income tax in the Budget.
Currently, the threshold for the 40% income tax bracket is £42,385. This is set to go up to £43,000 at the end of this tax year, and then to increase to £43,300 next year.
It has also been suggested that the chancellor may announce an increase to the income tax personal allowance quicker than expected.
All eyes will be on George during this next Budget on the 16th of March, as whichever decisions he does make will have ramifications for his own political future, the country as a whole and potentially the campaign regarding the EU referendum.