Jeremy Hunt’s huge pensions giveaway for the wealthiest 1% may have no impact on increasing the number of people in work, while opening a loophole for avoidance of inheritance tax, a leading economic thinktank has warned.
The Institute for Fiscal Studies said the surprise measure in the chancellor’s budget probably would not “play a big part, if any” in increasing the number of people in work.
Paul Johnson, the director of the IFS, said: “It was disappointing that other over-generous aspects of pension taxation – not least complete freedom from inheritance tax – were not reined in.
“The lack of any coherent strategy here remains deeply disappointing. Don’t forget these changes are largely a rowing back on changes made just a few years ago by this government.”
In an attempt to encourage older, skilled workers not to retire early, Hunt announced plans to scrap the £1m cap on tax-free pension savings. With the employers’ struggle to recruit staff holding back the economy, he argued that the change would discourage NHS doctors in particular from quitting.
Labour said the tax giveaway would benefit only the wealthiest top 1% of earners, while promising the party would reverse the chancellor’s decision to scrap the pensions lifetime allowance.
The Office for Budget Responsibility (OBR), the government’s independent economic forecaster, estimates the change could increase employment by 15,000. However, the IFS said even under this “optimistic” assumption, it would still come with a costly price tag of £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.
Hunt’s plan is aimed at encouraging workers who are close to the £1m lifetime allowance to continue working, including senior doctors, as the NHS struggles with workforce retention. However, the IFS said the changes could also incentivise early retirement because they would help high earners to reach their savings goals earlier.
Rather than being targeted at NHS workers, the measures will also help workers in other highly paid occupations such as banking and finance.
“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,” Johnson said.
The £1m pension pot tax break comes as the average UK household is expected to suffer the biggest two-year fall in real living standards since the 1950s. According to the latest OBR forecasts, real household disposable incomes are expected to be no higher in 2027 than in 2019, and barely higher than a decade earlier.
While inflation is expected to fall rapidly this year, prices remain higher than two years ago for consumers, while a freeze on income tax thresholds will mean that more people will be dragged into paying higher rates of tax.
“What households are going to feel over the next year will be continuing pain,” Johnson said.
Rishi Sunak launched a four-year freeze on income tax thresholds in March 2021. This was then extended by Hunt for a further two years at the autumn statement. Under the plan, the tax-free personal allowance – the rate at which workers begin paying the 20% basic rate of income tax – will be held at £12,571. The threshold for paying the 40% higher rate is also frozen at £50,271.
The IFS said the freeze would cost most basic-rate taxpayers £500 from April and most higher-rate payers £1,000.
On a day the government prepared to announce a formal pay offer to unions involved in NHS strikes in England, including a one-off payment of up to 6% for this year, the thinktank said it was implausible for the government to argue it was unable to raise public sector pay on affordability grounds.
“You can’t keep cutting the pay of teachers, nurses and civil servants, both in real terms and relative to the private sector, without consequences for recruitment, retention and service delivery,” Johnson said. “Money will have to be found from somewhere.”
The IFS said there were “some elements of a sensible strategy to support growth” in the budget, including the chancellor’s focus on getting more people back to work. However, it suggested that the government’s expansion of childcare support would have a “highly uncertain” impact on labour supply.
