One idea Number 11 is mulling for the upcoming budget, according to media reports is to cover the cost of National Insurance payments for workers in their 20s and 30s by cutting pension tax relief for older wage earners.
Hammond is keen to do more for young in his Budget on November 22 but the initiative, which is expected to be a cost-neutral rebalancing exercise, is fraught with complexity according to industry experts.
Complex to implement
60% of pension tax relief is received on employer contributions, rather than individual contributions making it relatively simple to restrict higher rate tax payers from reclaiming additional relief via their tax return at a certain age.
However, changes would be needed to catch employer pension contributions, including salary sacrifice arrangements, so that they can’t be used to circumvent the new rules and final salary pension schemes would also have be treated on an equal basis to money purchase pensions.
“While none of this is impossible, it is not simple, would take years to implement and is unlikely to deliver the immediate budget injection the Chancellor is seeking to help younger people,” said Tom Selby, senior analyst at AJ Bell.”
“The Treasury would also need to balance simplicity against fairness. Having different levels of tax relief based on age would risk layering extra complexity on an already complex system.
“There would also presumably have to be some form of means-testing involved to ensure super-rich younger workers aren’t given a bigger tax relief boost than older workers in less well-paid jobs.”
Jamie Jenkins, head of Pensions Strategy, Standard Life, agreed: “Looking at the differences between the generations is obviously one of the options available.
“While it may seem like a fair way of doing things, it runs the risk of being over complicated to administer and could add cost and complexity to the system.”
The controversy caused by the ‘Dementia Tax’ highlights for Hammond how politically risky pursuing older people with tax hikes is for Conservative chancellors.