The UK’s tax take has hit a 70-year high, but apparently it still isn’t enough. We all need to pay even more.
Politicians, think tanks and policy wonks are forever dreaming up new ways of taxing our wealth, and pensions are once again in the firing line.
As Prime Minister, Margaret Thatcher encouraged millions of ordinary people to save for their future in personal pensions, to ease the burden on the state.
Since then, almost every subsequent government has seen this pot of money as a cash cow to be milked whenever they are short of funds (which is all of the time).
The great pensions tax attack began in 1997 when Chancellor Gordon Brown axed tax relief on pension dividends.
That has ripped more than £200billion out of our pension pots (and counting). It also destroyed the nation’s gold-plated workplace final salary pensions, by making them too expensive to run.
Pensions have been a target the target of a string of stealth taxes, with the £40,000 annual allowance, the amount you can pay in every year, frozen since 2016.
The pension lifetime allowance has been slashed by more than a third, and frozen at £1,073,100 until at least 2028.
Tax relief on pensions contributions has somehow survived, but for how much longer?
Now there is a new threat.
Last month, the Institute for Fiscal Studies called for an inheritance tax charge on people’s pension funds when they die. It was overlooked in the pre-Christmas rush, but this remains a live threat and is already causing tax planning confusion as families wonder how to react.
Its report Death and taxes and pensions states that “the tax system treats funds that remain in a pension at death extremely favourably”, and demands change.
The IFS argues that our pension pots should be included in the value of estates at death and hit with the hated death tax.
It laments that fact that pensions are being used as a vehicle for bequests, as pensions and wealth-management professionals exploit this loophole.
Charging death taxes would “remove the perverse incentive to avoid using a pension to fund retirement”, it says.
Naturally, the move would raise yet more tax, sucking around £1.9billion a year out of the pockets of grieving families.
Laughably, IFS economists argue that the government could use this as an opportunity to cut the overall inheritance tax rate, saying it could fund a drop in the punitive tax charge from 40 percent to 30 percent.
As if that is ever going to happen.
The only direction taxes are going these days is up, as this suggestion makes perfectly clear.
Even today’s tax-happy Tory party will be wary of introducing a pensions death tax, as it will be dubbed, before the 2024 election.
Although thinking about it, maybe they would. Chancellor Jeremy Hunt has made a fetish of forcing us to pay more tax.
READ MORE: Fight back against Hunt’s inheritance tax and capital gains tax raid
If the Labour Party wins the next election, this change is almost inevitable. Kier Starmer will be under huge pressure to raise public spending and is likely to see a pensions death tax as an easy option to make the better off pay more.
Starmer won’t be using the extra money to cut the IHT rate to 30 percent, you can be sure of that. Instead the money raised will disappear into the government’s coffers.
My biggest concern is that this constant tinkering with pensions taxation can only backfire, by putting people off from saving for the future. Why bother when the rules could be changed at any time, and never in our favour?
Our retirement pots now have a big fat juicy target slapped on them, making them irresistible for every cash-strapped Chancellor.
This makes financial planning almost impossible, because people do not know what will be taxed next.
The IFS reckons that slapping a death tax on pensions will make our tax system more “coherent”. Yet it is already making retirement planning even more confusing and chaotic than it already is.
How can people plan when they don’t know what tax they will have to pay next?