Will the economic hangover help shape pension tax reliefs?
It’s the festive season again and – COVID-19 restrictions allowing – I suspect that many readers of this column are looking forward to eating and drinking rather well (if not wisely) with friends and family in the weeks immediately ahead.
Of course such indulgence often leads to an inevitable gastronomic or alcoholic hangover to be endured after the consumption has concluded. And that is very much the situation that the UK economy may be about to find itself in too.
A year ago
Yet the economic hangover will actually be starting somewhat later than was originally expected.
For it was a year ago this very day that The Chancellor of the Exchequer, Rishi Sunak, said;
“Our health emergency is not yet over, and our economic emergency has only just begun”
Sunak’s sentiment was spot on, yet the health crisis has lasted longer than many expected. Indeed there have been far more coronavirus infections and around twice as many deaths in 2021 as were experienced in 2020.
And 12 months later we are still not clear of the pandemic, with experts predicting another year to be endured before normality fully returns. Yet the nation appears to now be in a far better position than this time last year.
The game changer
In the run up to Christmas 2020 Margaret Keenan famously became the first recipient of a COVID-19 vaccine in the UK.
353 days later and the national vaccination programme has been extended to more than 88% of the population aged over 12, with the vast majority of adults having received both jabs, and booster vaccinations also well under way.
All of which suggests that 2022 might be the year that the nation – and hopefully the wider world too – can finally return to our old friend “business as usual”.
Yet that normality is likely to be accompanied by the first symptoms of the economic hangover.
The UK has of course been hugely reliant on the massive financial support provided by local and national governments over the last two years. As the nation finally rids itself of that dependency there will be an inevitable period of pain to be endured.
It’s also worth pointing out that, unlike other nations, the United Kingdom is weathering more than one economic storm. Indeed the Office for Budget Responsibility (OBR) – the government’s own forecasters – predict that the long-term economic scarring of Brexit may be twice as damaging as the economic impact of the pandemic.
And despite a surprisingly upbeat Budget speech from The Chancellor in October, the reality is that some significant financial pain must soon be endured as the nation grapples with the financial costs of the last two years.
Of course many of the economic hangover symptoms are already known and understood.
In March it was announced that many taxation thresholds would be frozen until the middle of this decade, and in September the government gave details of the new Health and Social Care Levy (which begins life as an increase to National Insurance payments) which commences from April 2022.
And both business and individuals are already experiencing the challenges of inflation and supply-chain shortages as I detailed in this October post.
The traditional cure to such financial pain is economic growth. And whilst the economy is doing relatively well, the headwinds and uncertainties of another pandemic winter – plus the limitations to both corporate and individual discretionary spending budgets – may contain that upside for some time to come.
So Sunak may look to other solutions – and that could mean further direct taxation increases. Yet that route may prove problematical, not least because the nation is about to experience one of the highest ever sustained levels of taxation from April 2022 onwards.
It should also be noted that there are persistent rumours of a General Election in early 2023, which probably suggests that the Chancellor would have to present any additional increases as part of a wider political agenda – and not purely as a revenue-raising mechanism. This limits the options available even further.
Pensions tax relief
But there remains one obvious target for Sunak and the Treasury team to consider.
Many believe that pension tax reliefs – once described by former Chancellor Philip Hammond as “eye wateringly expensive” – have been living on borrowed-time since the Credit Crunch of 2008. Indeed in 2015 virtually all credible commentators expected significant changes to higher-rate relief would be made (please see this Employer News article from 2019).
Yet the political hiatus caused by the Brexit debate, followed by the arrival of COVID-19, has led to a prolonged stay of execution. That said, the justifications for changing the system remain much the same, and are perhaps strengthened further given the current government’s promises to “level-up” the nation.
The night is young
So it’s quite possible that the pain of a COVID-19 economic hangover might yet extend to alter the shape of pension tax reliefs in 2022 and well beyond.
Yet changing the long-established system to incentivise pension savings probably can’t happen overnight, and would benefit from at least some consultation with employers and the pensions industry before that alteration can be implemented.
In the meantime employers may wish to help their employees to understand and harness the currently very generous system of pension tax reliefs.
So drink deep whilst the existing system persists. The hangover can wait for another day.
Steve Herbert is Head of Benefits Strategy at Howden Employee Benefits & Wellbeing