Sajid Javid is weighing a big tax raid on higher earners in his March Budget to help fund Boris Johnson’s plan to “level up” the economy, including a long-mooted shake-up of pension tax breaks.
The chancellor’s allies said he was committed to making the tax system “fair and efficient”. Treasury insiders confirmed he was considering reforms that would hit the better off and ease pressure on strained public finances.
Among the measures under scrutiny is the system of pension tax relief, which mainly benefits richer people. It costs the Treasury almost £40bn a year in foregone income tax revenues.
Under the current system, people saving into a pension receive tax relief at the same rate as their income tax rate. Restricting the tax relief on pension contributions to 20 per cent, compared with the 40 per cent enjoyed by higher rate taxpayers, would raise more than £10bn extra a year.
Mr Javid is working with the prime minister on the tax reforms in an effort to meet the Conservative party’s election manifesto pledge to remove “arbitrary tax advantages for the wealthiest in society”.
The chancellor has yet to reach final decisions on what he will include in his March 11 Budget, but it will be a test of whether Mr Johnson is willing to increase taxes on traditional Tory voters — including millions in the party’s southern England heartlands — to help new Conservative supporters in the north.
The government is at risk of failing to meet its fiscal rule to secure a balanced budget on day-to-day spending by 2023, highlighting why the chancellor may opt to propose tax rises in the Budget.
The Treasury said: “We don’t comment on speculation. All taxes are held under review and any changes are announced by the chancellor at the Budget.”
Treasury officials are pushing Mr Javid to reform taxes that mainly benefit the better off: pension tax relief, inheritance tax, entrepreneur’s relief and capital gains tax.
A planned cut to corporation tax from 19 per cent to 17 per cent has already been scrapped by Mr Johnson to release extra public spending for the National Health Service.
Mr Javid has separately signalled he will curb entrepreneur’s relief, which will cost the Treasury an estimated £2.1bn in 2019-20. He could go further by including capital gains tax on assets at death.
But the chancellor is said by colleagues to be wary of sweeping tax reform because of the fierce backlash that would ensue from traditional Conservative voters. “Saj is not 100 per cent convinced”, said one Treasury insider. “It’s a live debate.”
Some of Mr Javid’s colleagues said he might put reforms out to a consultation in the Budget, with a view to making any controversial tax changes at the second Budget scheduled for the autumn.
“You might need to do some pitch-rolling first,” said one. “We’ve got two Budgets this year.”
Mr Javid told the Financial Times last month that his Budget priority was to boost “human capital”, including investment in skills and further education, as well as promoting infrastructure schemes in the Midlands and the north.
Richard Holden, the new Conservative MP for North West Durham who seized the constituency off Labour, said he would like to see tax reform play a big part in the Budget. “Cutting taxes for working people is the top priority,” he added. “I’m sure it will be a Budget for the north.”
George Osborne was the last Tory chancellor to try to reform pension tax relief, but had to abandon the plan in 2016 in the wake of a Daily Mail campaign which warned that “middle class savers could lose a third of their pensions in tax changes”.
But experts believe the conditions today are more conducive to a shake-up.
“I think the government today would find it easier to push through changes,” said Tom McPhail, head of policy with Hargreaves Lansdown, the investment manager. “Partly because the sense of social equity is much stronger than it was.”
But cutting pension tax relief is seen as a poor tax reform by some experts. Stuart Adam, economist at the Institute for Fiscal Studies, a think-tank, said: “There are good ways to get money from well-off people and the pension system. Cutting tax relief is not one of them.”
He suggested ending the tax-free lump sum for pensioners and the inheritance tax relief on pension pots at death.