It is “highly unlikely” that the Chancellor will bring in a flat rate of pension tax relief in the Autumn Budget, LCP has said, due to the potential disproportionate effect on public sector workers.

LCP's analysis examined potential changes to pension tax relief as part of the Budget, noting the Labour manifesto pledge not to raise rates of income tax, National Insurance (NI), VAT, and corporation tax suggested that the Chancellor may take a keen interest in pension tax relief.

While LCP said a flat rate of tax relief was “highly unlikely”, the firm suggested that employer NI could instead be levied on employer pension contributions.

Currently, employer contributions are exempt from NI, leading to widespread use of ‘salary sacrifice’ in schemes to reduce employer’s NI bills, costing the government around £23.8bn annually.

LCP noted that the government could introduce a new NI rate on employer contributions, starting low but with the potential to generate additional revenue. 

Alternatively, it argued the government might abolish NI savings from ‘salary sacrifice’ schemes for both employers and employees, thereby increasing NI revenues.

“The Chancellor will be looking for relatively simple changes which can be introduced quickly and will raise large sums with least voter anger,” LCP partner, Steve Webb, said.

“Changes to taxes on business may fall within that category, and the large cost of exempting employer pension contributions from NI contributions will not have escaped the Chancellor’s attention.”

LCP also suggested that the Chancellor could consider lowering the cap on tax-free lump sums, for instance from the current lifetime limit of £268,275 down to £100,000.

However, this could impact many public sector workers and require a complex system of protections, reducing short-term revenue and potentially facing political opposition, potentially making it an unattractive option.

“Capping tax-free lump sums sounds simple in theory but would be complex in practice,” LCP partner, Alasdair Mayes, stated.

“Complex transitional rules would need to be designed for those who would otherwise be unfairly affected by the change, and this could mean it would take months or years to implement. 

“This would also reduce the revenue-raising potential of the measure and may mean the Chancellor decides it is not worth the political pain”.

The research added that the Chancellor could consider reducing the tax-free inheritance of pension pots for those who die aged under 75 in the Budget, but LCP said this would “raise relatively little revenue”.

The Chancellor could also consider removing the inheritance tax (IHT) exemption for money purchase pension pots, which are currently excluded while other assets like ISAs are not.

However, LCP pointed out that this could create unfairness for cohabiting couples, raise only modest revenue due to the nature of defined benefit pensions, and could lead to calls for protection for those who have planned their retirement on the existing rules.

Additionally, this move could cause a “strong behavioural reaction” with retirees finding other ways to avoid IHT, suggesting again the political backlash could outweigh the short-term financial gains.

Commenting on this, LCP senior consultant, Tim Camfield, said: “Pension pots currently offer significant tax benefits upon death, generally being shielded from IHT.

“While it can be argued that reform could encourage the use of pensions for income to the saver and their spouse rather than inheritance, any changes must be weighed carefully to avoid unintended consequences such as penalising unmarried partners.”

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