Rachel Reeves is being urged by the Resolution Foundation to introduce a £9 billion tax on pension contributions in the next Budget to tackle rising government spending.
The left-wing think tank recommends that companies should be required to pay national insurance on contributions to staff pension schemes, arguing that the current tax relief is “unnecessary” and “arbitrary”.
However, this proposal has raised concerns among experts who warn it could discourage employers from contributing to staff pensions. Steve Webb, former Pensions Minister and current partner at consultancy LCP, warned: “We want employers to be generous and pay generously into people’s pensions. The more we charge them for that, the less they will do.”
Under current rules, employees must contribute at least 5% of their salary to a company pension, while employers pay at least 3%. Although employees pay National Insurance on their contributions, companies are exempt. The Resolution Foundation proposes to bring the tax treatment of company contributions in line with the 13.8% rate applied to other employer national insurance contributions.
The proposed changes would impact millions of workers, especially those receiving premiums above the minimum rate. Many companies currently offer matching schemes, with around 13.9 million employees benefiting from contributions exceeding 4% of their wages – a significant tax-free benefit. Critics argue that the introduction of this tax could prompt employers to reduce their pension offerings or adjust compensation to offset the increased tax burden.
The think tank estimates that these changes could raise £9 billion for the Treasury, and also recommends increasing inheritance tax and capital gains tax to secure a further £20 billion, which could prevent serious cuts to public services. However, adopting such measures could expose Labor to accusations of breaching its election promise not to raise taxes on working people.
The Resolution Foundation’s suggestion comes amid wider discussions within Labor over pension tax reform. Baroness Drake, a prominent figure in Labour’s past pension reforms, has advocated a ‘flat rate’ approach to tax relief, which could impact as many as six million taxpayers with a higher or additional tax rate. This policy change would cause high income earners to pay more tax on their pension contributions, potentially reducing tax benefits for wealthier savers.