Rachel Reeves will reportedly target employee pension contributions in a bid to raise more money at this month’s crunch Budget.
The chancellor, according to The Times, is expected to limit an existing tax break on salary pension contributions by introducing a cap on the amount saved for retirement without incurring national insurance payments.
The newspaper claims employee contributions of more than £2,000 a year would be subject to national insurance – a move that could raise up to £2 billion per year.
It comes at the end of a week in which Ms Reeves reportedly told the Office for Budget Responsibility (OBR) that she intends to increase income tax in the budget, which will be unveiled on 26 November.
Despite Labour’s manifesto pledge to the contrary, she is said to be weighing a 2p rise in income tax, balanced by a 2p cut in national insurance in order to effectively cancel out the burden on workers.
But this week, Labour new deputy leader Lucy Powell warned a break in the manifesto could damage “trust in politics”, as a split emerged at the top of the party over measures to fill an estimated £30bn hole in public finances.
Economists have repeatedly warned Ms Reeves that a combination of Labour U-turns, higher borrowing and sluggish economic growth means she must raise taxes or tear up her flagship borrowing rules in the Budget.
Limiting salary sacrifice schemes would offer a smaller boost to public finances, mostly affecting high earners.
The Times reports an employee earning an income of £50,270, putting aside ten per cent of their salary through a sacrifice scheme, would pay an additional £240 a year in national insurance contributions under the proposal.
Also under consideration, the newspaper reported, is limiting the existing national insurance exemption for employers, which could mean they would have to pay an additional £450 on the same income and sacrifice.
Ms Reeves is also said to have decided not to cut pension lump-sum withdrawals, offering some reprieve to pensioners. Those retiring will still be able to withdraw up to a quarter of a total pension pot up to £268,275.
On Wednesday, education secretary Bridget Phillipson showed her support for Ms Reeves, telling the BBC that “there are some big challenges in the economy” and the government will have to do “what’s right, what’s necessary” for the public and the long-term future of the economy.
The chancellor put the country on notice that sweeping tax rises are coming in her Budget, in an announcement to the public this week. “Each of us must do our bit,” she said.
