Labour has proposed to cap pensions tax relief at 20% for those earning over £150,000 a year in order to fund a job guarantee programme for the unemployed.
Ed Balls, Labour shadow chancellor, outlined the party’s plans in an article for PoliticsHome. These are aimed at guaranteeing a minimum wage job for those who have been unemployed for two years.
The cost of the scheme would be covered by a 20% cap on tax relief on pension contributions for people earning over £150,000, which would raise £1 billion per year, Balls said.
He said: “When times are tough, it cannot be right that we subsidise the pension contributions of the top 2% of earners at more than double the rate of people on average incomes paying the basic rate of tax.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “One of the principal problems with pensions planning is the current lack of engagement right across the population.
“Many people don’t trust pensions because they are subject to persistent political interference. Only a third of private sector employees are currently participating in a workplace pension.
“Auto enrolment will get people in to pensions over the next couple of years but it won’t address the more fundamental challenge of promoting engagement. Every time a politician announces another madcap scheme to tax pensions, it discourages more people from saving for retirement.”
George Bull, senior tax partner at Baker Tilly, added: “First, this will cost each person affected by the proposed change up to £10,000 per year in extra taxes. It will raise an estimated £1 billion. With 129,400 people out of work for 24 months or more that equates with funding of £7,728 per job which might be created.
“If the scheme works as intended by Mr Balls, that means that each top-rate tax-paying pension contributor will support new temporary jobs for 1.3 long-term unemployed.
“Second, there is no suggestion that the proposal will effect people with marginally less taxable income. On that basis, whereas a person with taxable income of £150,001 will suffer additional taxes of up to £10,000, a person earning £149,999 will not. Another fiscal cliff?”