We know that ahead of the last election civil servants were preparing for fundamental changes to the tax system. So it wouldn’t be beyond the realms of possibility that the Tories could push the freedom and choice agenda further.
There has been talk of creating a tax regime that is much simpler. For example when all money is taxed at source and then exempted in retirement. (what is known in policy terms as TEE)
Why would they do this?
There are two possible motivations: tactical and ideological.
Firstly – tactical:
Tax take is upper most in the mind of the Chancellor. He’s made huge promises to reduce the national debt which he’s finding it hard to achieve as we know.
If the entire £2.7bn withdrawn so far as a result of the freedom and choice changes was taxed at emergency rates at the top rate of income tax of 45% then HMRC would have collected £1.2bn in the first six months. Not a bad tax take and somewhat impactful on the budget, but probably not sustainable.
The Chancellor is thinking about how he can maximise tax take in the longer term without it looking like a tax rise. Current arrangements for EET is expensive.
Michael Johnson of the Centre for Policy Studies tells us that pension tax relief incentives totalled more than £52bn in 2013-14 but only one-in-seven of those who receive higher-rate tax relief while working ever pay higher-rate income tax in retirement.
In other words, tax relief is not income tax deferred, it is income tax that is never paid.
It is also clear, therefore, that consumers pays less tax in retirement than they would do if they were taxed on that money in accumulation. So there is lots of political merit for the government in moving to a TeE tax regime.
Secondly: Ideological
Fundamentally the Conservative Party at its core is a pro-freedom libertarian movement.
That pure fundemantalism is more prominent on the right of the party and used to be marginalised. But while the government has a small majority every conservative member vote counts, so the Prime Minister is having to listen hard to the right of the party. Indeed, David Cameron has put some conspicuously libertarian politicians on the front bench. So the right of the party have increasing clout.
The Conservatives have also built a great rhetoric around personal freedom and reducing state intervention.
Michael Johnston, former Conservative Party Central Office director, has been calling for the end to pensions for some six years now. He wants to wrap all savings into one big ISA which you can access any time. He has been saying we need to get rid of pensions, and he’s pretty chipper about what he’s achieved so far.
Is the government following the agenda of the Centre for Policy Studies?
As the government considers the response to the consultation on tax, we probably need to put on our hard hats for the potential of another bombshell on the policy arena.
Unsurprisingly there is some quite serious opposition to this agenda.
One labour politician told me that this policy marks the ‘end of pensions – a policy wrecked and increase in pensioner poverty’.
The philosophical differences between the left and the right will continue to play out on the fundamental approach between personal freedom and protection for people in retirement.