Labour to reverse 'tax cut for the rich' pension reform if it wins the next election
Chancellor Jeremy Hunt announced he will also increase the pensions annual tax-free allowance under measures designed to increase the workforce by removing disincentives to being employed for longer. But Labour says it only benefits a wealthy few and will push for a vote on Tuesday.
Thursday 16 March 2023 10:23, UK
Labour has pledged to reverse plans to abolish the lifetime pensions allowance if it wins power, calling it "a Tory tax cut for the rich".
The party released analysis saying the policy proposed in Jeremy Hunt's budget will save the wealthiest 1% of pensioners £45,000 when they retire.
Shadow chancellor Rachel Reeves told Sky News it was "the wrong priority" amid the ongoing cost of living crisis, and pledged to push for a vote against the measure in the Commons next Tuesday.
However, also speaking to Sky News, the chancellor accused Labour of shifting its position "overnight", pointing to remarks by shadow health secretary Wes Streeting in September calling for the limit to be scrapped.
Responding on Twitter, Mr Streeting said he had called for a change specifically for doctors and the Tories opposed it at the time.
Politics live: Chancellor speaks to Sky News after delivering budget
Ms Reeves said she was "astonished" by the announcement on Wednesday as it came "at the same time as... ordinary working people are facing the highest tax burden in 70 years and the biggest falls in living standards ever recorded in history.
"That is the wrong priority."
How are pensions changing?
The chancellor announced two changes to the way pensions work.
Scrapping £1.07m lifetime tax-free pension allowance from April 2024
Previously if someone had paid more than £1.07m into their pension pot over their lifetime (excluding their state pension), they would have to pay extra tax, whether they received the excess as a lump sum, or if they received income relating to anything above that amount.
The tax they paid on the amount received on any excess above £1.07m was up to 55%, regardless of whether they received it as a lump sum or regular income.
But from April 2024 that threshold is being scrapped, which means no extra tax will be payable on any payouts received. They will be taxed the same as anyone else - based on how much they receive in the financial year.
Tax-free lump sum payments will be kept at a max of 25% of the £1.07m limit however.
Even before then, from 6 April 2023, a 55% tax "charge" that was levied on any payouts received on amounts in a pot above £1.07m is being scrapped, and reduced to what any taxpayer would usually pay on their income.
The chancellor said these changes would stop 15,000 highly paid workers, including senior NHS staff, from retiring early.
But Labour and thinktanks have argued it is just a tax cut for the highest earners – saving the wealthiest 1% of pensioners up to £45,000 in tax when they retire.
Increasing annual tax-free pension allowance from £40,000 to £60,000 from 6 April 2023
Normally, people do not pay tax on their annual pension contributions, which are deducted from their pay packet before any tax is paid. But if their contributions to their pension pot go over an annual allowance, they do have to pay tax.
Previously people would start paying tax on anything above £40,000 accumulated in a year, but from 6 April 2023 this will increase by 50% to £60,000 a year.
The government hopes that it will encourage some high earners like doctors, who would have been disincentised from working longer because their pension contributions would have been subject to tax, to now work more because they will pay less tax on their pension.
Mr Hunt used his budget on Wednesday to announce the abolition of the lifetime pensions allowance.
It means people will be allowed to put aside as much as they can in their private scheme without being taxed - removing the £1.07m limit.
The chancellor also said he would increase the pensions annual tax-free allowance from £40,000 to £60,000, under measures designed to increase the workforce by removing disincentives to being employed for longer.
The policies will cost the Treasury more than £1.1bn a year by 2027-28, with the aim of stopping an estimated 15,000 high earners - including senior NHS doctors - leaving the workforce.
But Ms Reeves called it a "gilded giveaway" coming at a time when many people across the country face "rising bills, higher costs and frozen wages".
She added: "That's why a Labour government will reverse this move. We urge the chancellor and the Conservative government to think again too."
Asked by Sky News if the NHS needed more nurses rather than encouraging back consultants, the chancellor said the government was recruiting more staff but pensions rules deterring doctors were "a big problem".
He added: "Wes Streeting said we should get rid of the cap on pensions, the lifetime allowance. He seems to have changed his mind overnight on that one. He said it was crazy and it would save lives to get rid of that cap.
"Well, he was right in September when he said that."
In response on Twitter, Mr Streeting posted: "Labour called for action on DOCTORS' pensions to help retention.
"The Tories attacked our suggestion of a tax unregistered scheme on cost grounds. Now you've come up with a massive bung to the richest costing £835m a year."
Labour said they would encourage doctors to stay in work by creating a targeted scheme as the government has done for judges, "rather than create a free-for-all for the wealthy few".
Read more on the budget:
The key points of Chancellor Jeremy Hunt's speech
Tax calculator - see if you're better off
Who are the winners and losers? How three real households are affected
Ed Conway: There's a feel-bad factor coming, and this budget won't help
Experts said that millions of savers will feel no impact from the changes, with Institute for Fiscal Studies (IFS) Director Paul Johnson saying they would "encourage a relatively small number of better-off workers to stay in the workforce a bit longer".
Meanwhile, the Resolution Foundation warned the policies may actually cause some workers to retire early or use "their now uncapped pensions saving to avoid inheritance tax".
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Chief executive Torsten Bell said the measures are "hugely regressive and wasteful", adding: "It's a big victory for NHS consultants but poor value for money for Britain."
Sir Keir Starmer, the Labour leader, also hit out at the plan, saying: "The only permanent tax cut in the budget is for the richest 1%. How can that happen?"
Budget at a glance
The pensions tax break was one of the headline announcements from Mr Hunt's budget, alongside a pledge to introduce free childcare for children under three.
Some key policies were revealed ahead of the chancellor's speech, including keeping the cap on energy prices at £2,500 for a further three months, despite a planned rise to £3,000 in April, and 12 new investment zones.
Unions reacted angrily to a lack of measures on public sector pay, saying Mr Hunt "stuck up two fingers to workers with the budget".
The announcement took place against the backdrop of an estimated half a million workers, including junior doctors, teachers and civil servants, walking out in disputes over pay, jobs and conditions.