The Budget has now landed. After weeks, if not months, of agitation and speculation, we can now finally see what the measures are. Remarkably, we could do this before Chancellor Rachel Reeves stood up to deliver the statement, thanks to the Office for Budget Responsibility’s (OBR) unprecedented leak.
As expected, taxes have been increased. It was obvious that taxes on property and pensions, accompanied by a reduction in cash ISAs, would be introduced, since Reeves had ruled out increases in VAT, income tax and employee national insurance (NI).
What makes the pension tax raid in particular so invidious is the fact that these taxes will be paid mainly by people who were always striving to do the right thing – properly saving for their retirement.
Reeves announced plans to clamp down on salary sacrifice schemes, which allow workers to give up part of their gross pay in return for a non-cash benefit such as pension contributions, childcare, or an electric car. Pension contributions above £2,000 a year using these schemes will now face NI from April 2029.
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This is only going to discourage people from putting money in their pensions – and those closer to retirement will likely have already planned to put more of their current income through these schemes for the rest of their working years to shield it from NI.
The effect of boxing themselves in with the manifesto commitment of “no increases in taxes” on “working people” has meant that the government has had to find new groups to increase taxes on and this time it’s the soon-to-be retired who are in the firing line.
This represents a tax grab on prudent, hard-working people who have tried hard to provide for their old age. More broadly, such a tax grab disincentivises the very prudence governments have always encouraged.
A person in their late 40s or early 50s typically earns the most and therefore is more likely to be comfortable enough to make higher pension contributions.
This measure, therefore, will no doubt foster an attitude which is less conducive to making any sacrifices today for a benefit in the future. Why bother if this income will be taxed the same in any case?
In addition to the higher taxes paid on pensions, we also have the prospect of a frozen income tax threshold, resulting in “fiscal drag” where people are dragged into higher tax bands when they get pay rises.
And there is also an anticipated rise in fuel duty from next September, as well as the cutting of the Cash ISA savings limit from £20,000 to £12,000.
This last measure is, of course, a further disincentive to save money for a rainy day or a pension. This means that the Budget as a whole is going to make people a lot less likely to save for their retirement.
The least gratifying aspect of this Budget is arguably the downgrading of next year’s growth figures by the OBR. All these forecasts have to be taken with the customary pinch of salt, but a downward revision of forecasts generally means more tax rises are coming.
The risk is that, after lumbering us with further tax increases of almost £26bn, Reeves or her successor will simply repeat the tax raising turn next year.
Then the smorgasbord approach may have run out of road, with fewer options to raise taxes. The drastic option of revisiting the big levers of income tax, VAT and NI on employees will rear their ugly head again.
Kwasi Kwarteng served as Chancellor between September and October 2022 under Liz Truss
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