Jeremy Hunt is battling to justify his budget pensions giveaway to the 1% after two leading economic thinktanks warned it could have no impact on NHS retention while opening up a vast new loophole for tax avoidance.
The Institute for Fiscal Studies and the Resolution Foundation both said it was doubtful the £1bn tax break would meet the chancellor’s stated goal of retaining more senior doctors in the workforce, and could allow wealthy individuals to avoid inheritance tax.
Keir Starmer, the leader of the Labour party, renewed his attack on the surprise decision at the heart of the chancellor’s budget, promising to reverse it if his party won the next election. Starmer has said Labour would address the staffing crunch in the NHS by limiting the tax break to doctors only, rather than extending it to all high earners.
He said: “It’s very easy to bring in a tailor-made approach just for doctors; it was done for judges just a few years ago. And so the idea that a billion pound giveaway to the richest 1% was necessary just falls apart the moment it is examined.”
On a day of heavy criticism over the move, the chancellor insisted his budget had not served as a giveaway for the rich.
Billions of pounds would help people in the cost of living crisis, Hunt said, adding: “I think it is a rather bizarre thing to say that when this is a set of measures that means in two weeks’ time we are going to be spending a total of £94bn this year.”
Government ministers and backbench Conservative MPs pointed out that Labour had also promised to remove the cap for doctors, while arguing that Hunt’s changes were quicker and less bureaucratic than singling out one sector of the economy.
However, Paul Johnson, the director of the IFS, suggested the tax break would not “play a big part, if any” in increasing the number of people in work.
“If the fundamental problem it was trying to address was doctors, then it was a rather large sledgehammer to crack a very small nut, and a billion-pound sledgehammer at that,” he said.
The Resolution Foundation said the policy amounted to a “large giveaway to a small number of higher earners who already benefit most from our approach to pension tax relief.”
It estimated that someone with a £2m pension pot would receive a tax cut of almost £250,000, which could encourage them to retire earlier than otherwise would have been the case – undermining Hunt’s stated goal.
“The beneficiaries from these reforms stand to gain large amounts, and they are heavily concentrated among the very rich,” it said.
Of the roughly 80,000 non-retired people with pension pots in excess of £1m who are likely to benefit, almost all (96%) were among the top 10% richest earners in society.
The Office for Budget Responsibility (OBR), the government’s independent economic forecaster, had estimated the change could increase employment by 15,000. However, the IFS said the estimate was “optimistic” at best and would still come with a costly price tag of about £100,000 a job.
Official figures showed as few as 8,600 pensions were subject to charges for exceeding the lifetime allowance in 2020-21, out of almost 600,000 retirement pots accessed for the first time.
The average UK household is expected to suffer the largest two-year fall in real living standards since the 1950s. Real household disposable incomes are expected to be no higher in 2027 than in 2019, and barely higher than a decade earlier.
Although inflation is forecast to fall rapidly this year, prices remain higher than two years ago for consumers, while a six-year freeze on income tax thresholds imposed by the government will drag millions of people into paying higher rates of tax.
According to the Resolution Foundation, taxes as a share of the economy were on track to hit 37.7% by the middle of the decade, a 70-year high, and the equivalent to nearly an extra £4,200 for every UK household.
The OBR estimates that wages growth over the next five years will force 3.2 million people to pay tax for the first time, put 2.1 million into the higher rate tax band, and add 350,000 additional rate taxpayers.
Torsten Bell, the chief executive of the Resolution Foundation, said: “Our citizens’ living standards are stagnant. We ask them to pay higher taxes, while cutting public services. No one budget could turn that around, but it’s time Britain did.”
