Chancellor Philip Hammond’s first (and last) Spring Budget was not quite the steady-as-you-go, non-controversial event it was supposed to be.
A month on, we are still talking about the subsequent early U-turn on the planned increase he had announced on Class 4 National Insurance contributions for self-employed workers. Not only is the increase now unlikely to happen, but speculation is rife in pension circles as to where any new money needed will come from instead.
The case for increasing self-employed workers’ NICs to a level closer to those paid by employees was not actually unreasonable in economic terms, but it fell down badly at a political level. It contravened a manifesto commitment, upset many of the Conservative Party’s traditional supporters and ran the risk of creating a backbench revolt.
Timing was also an issue. Had an announcement about the NICs been included in the White Paper published in January 2013, setting out the plans for the new state pension, the Government might have just about got away with it. The self-employed were one of the groups that stood to gain most from the new state pension and, seen as part of a package, the NICs rise would have been a lot less controversial.
At that stage it would also have preceded the short-sighted pledge made in the Tory manifesto at the 2015 General Election to embargo all further increases in tax and NI for a full five years. Shooting yourself in the foot – possibly in both feet – is the phrase that most comes to mind in this context.
In terms of costs, the NICs hike was due to bring in a total of around £2bn over four years. This would have affected an estimated 2.5 million workers, although, in conjunction with the simultaneous scrapping of Class 2 NICs, no one earning less than £16,250 a year in 2019-20 would have been worse off.
In the overall scale of things, the shortfall created by the U-turn is not huge. But for a cash-strapped Chancellor with very few alternatives, there will now be a need to raise revenue elsewhere and a temptation to target the £25bn in tax reliefs on pension savings the Government gave out last year.
Could this involve the introduction of a flat-rate of pension tax relief? Although higher earners do receive a much greater share of tax relief on their contributions than lower earners, moving to a flat rate would be seen as an attack on the middle classes and the Government is probably disinclined to run that risk at this point in time.
As a result, Hammond may be leaning towards reducing the annual allowance from £40,000 to either £35,000 or £30,000 and, although less likely, he may need to look at the lifetime allowance as well.
I find all this terribly depressing – not just because further cuts in pension incentives are being contemplated but because of the piecemeal way it is being done and the clear lack of any strategic direction of travel inherent in it.
We want an end to this continual tinkering with the rules and for politicians to stop using pensions as a convenient cash cow. That does not necessarily mean, of course, there are no further substantial changes needed. I doubt there are many people who really believe the present system of tax reliefs and allowances ticks all the boxes and is fair and equitable in all respects.
Many of us would like to see an end to the lifetime allowance sooner rather than later, even if that meant having to accept a cap on the amount of tax-free cash that can be paid. A single rate of contribution tax relief, higher for current standard rate taxpayers but lower for higher and additional rate taxpayers, were it eventually to be accepted, might also help to even out the amount of relief received by different groups and make the lifetime test much less relevant. Similarly, it would be great if we could get rid of the ridiculously complicated tapered allowance for high earners, which arguably does more harm than good.
We will probably find out at the Autumn Budget whether – and, if so, how – the Chancellor intends to make good the NICs shortfall at the expense of pension tax reliefs. Beyond that, I am not sure we will necessarily be any clearer what, if any, further plans the Government has for pension tax relief over the longer term.
Malcolm McLean is senior consultant at Barnett Waddingham