Rishi Sunak, the Chancellor, has been warned off a pensions tax raid by senior government ministers who have said a radical shake-up would fail to pass Parliament without cross-party support.
The Telegraph revealed on Monday that Treasury officials are looking at three major reforms to how pension contributions are taxed to cover heightened pandemic spending.
On Monday, there was push-back from some senior Tories to the ideas being pursued, in a reflection of how politically challenging major pensions reforms would prove.
One minister with an economic brief stressed that Conservatives should be encouraging people to put into their pension pots rather than making changes that could discourage it.
The source told The Telegraph: “Anything to do with pensions, because it’s such a long-term gain, we have to proceed with caution. If we do anything radical you need to build consensus across Parliament.”
Kwasi Kwarteng, the Business Secretary, played down the chance of a pensions policy overhaul this year, telling Sky News: “I don’t think that that’s necessarily the way forward.”
The Treasury’s interest in pension tax reform comes as they attempt to bring down heightened public spending due to the pandemic amid spiralling borrowing costs.
Mr Sunak, who sees himself as a low-tax Tory, wants to balance the books. But Mr Johnson has pledged that there will not be a return to austerity and made expensive public spending commitments.
One idea being pursued in the Treasury is reducing the pensions lifetime allowance from a little above £1 million to £800,000 or £900,000, with tax charges kicking in above that level.
A second is picking a single rate of pensions tax relief. A third is increasing taxation on employer contributions. The changes have the potential to raise billions of pounds for the Treasury.
Dominic Cummings, Mr Johnson’s former senior adviser, on Monday threw his support behind pensions reform as he answered questions online.
“I think there are unjustified subsidies for [the] rich in [the] detail of pensions/capital gains that I’m in favour of removing,” wrote Mr Cummings.
He argued his support for such reforms was “driven by fairness/perceived fairness” rather than the money it would raise for the Government.
Mr Cummings, now a vocal critic of the Prime Minister after leaving Number 10 late last year, also said that Conservatives will “struggle to cut spending” with Mr Johnson in charge.
Interest in clawing back tax revenue from pensions in the Treasury reflects the restrictions that have been placed on the department when it comes to raising money.
Mr Johnson’s Dec 2019 election manifesto promised not to raise the rates of income tax, VAT or national insurance tax – a pledge dubbed the “triple lock”.
But it means the major levers for raising tax are now unavailable to the Chancellor as he manages a surge in public spending from propping up the economy during the pandemic.
A Treasury source close to the Chancellor played down the chance of an imminent change in Covid tax policy, stressing it has not been a priority for Mr Sunak in recent weeks.
How much savers would lose out on if pension tax relief is limited to basic rate of 20pc
Other figures in the Government are pushing for measures to encourage people to put aside more of their income into pensions, showing the divergence of views across the Tory front bench.
Analysis by the TaxPayers’ Alliance shows that Mr Johnson is on track to be spending more by the end of this Parliament than recent past prime ministers.
By his fifth year in office Mr Johnson’s Government is on course to have a total managed expenditure of 41.9 per cent of GDP, according to the analysis.
That is higher than David Cameron (41 per cent), Tony Blair (37.4 per cent) and Sir John Major (37.4 per cent) in each of their fifth years in Downing Street.
John O’Connell, chief executive of the TaxPayers’ Alliance, said: “Even compared to Cameron and Blair, Boris is a big spender. Unrelenting spending commitments after Covid-19 are simply unsustainable.”
Government sources have often noted that the British economy went through a once-in-300-year drop when the pandemic hit, forcing the country into lockdown, making such comparisons difficult to make.