Reeves must tread careful on pensions at Autumn Budget 2024, to not go down as badly with contractors as Gordon Brown

Whether it will emerge before October 30th or precisely at Autumn Budget 2024, a raid on pensions by new chancellor Rachel Reeves is a mooted move that just can’t keep out of the headlines, writes independent financial adviser Angela James, founder of Yolo Wealth.

The latest iteration is that small businesses – including SMEs run as limited companies -- are apparently going to have to fork out more for their employee pension contributions.

The UK’s £20bn black hole; pensions are bound to be part of the filler

All of the Reeves ‘will-she-won’t-she’ pensions raid stories are a bit unsubstantiated. But it’s not a ludicrous suggestion that UK employers – who put in just 3 per cent will be forced more towards the position of Australian employers, who put in 12 per cent.

All in the name of filling the UK’s £20billion black hole in the public purse.

Yet it might feel a bit ludicrous to privately owned, small limited companies, not just because they’ve had a rough time of it of late, but because Labour’s 2024 election manifesto firmly stated they would “not raise taxes on the working people.”

Labour’s 2024 manifesto promises on pensions

Don’t think that such wording constitutes pledge enough to say the final bastion of tax-free saving would be alright under Labour? Well, the party also spoke of “no plans to change the pension tax relief system.”

Furthermore, before storming the July 4th general election, Labour rescinded the not pleasing suggestions that a Kier Starmer-led government would re-introduce the lifetime allowance. That was a cap on how much you can stash away from HMRC for retirement which the prior government vowed to remove and is so far holding up under Labour.

What contractor pension savers will be told on October 30th at Autumn Budget 2024

However, shock horror. The consensus is that on October 30th, the contractor sector will be told that some of the above promises just aren’t achievable anymore, due to the sorry state of the economy that Labour inherited. 

Unless you are Reeves or in her inner circle, there’s no way of knowing exactly what might be heading our way on the pensions front.

But there is a sense that the groundwork has been laid for some nest egg changes that could be hard to swallow.

Reeves’ feelers are out to increase auto-enrolment minimum contributions

In a sign that the chancellor is aware of the careful approach required to avoid an outcry, Reeves has reportedly been sounding out pensions providers about what they think of her upping auto-enrolment minimum contributions.

We will possibly hear the details at the incoming Pensions Review which was signalled at King’s Speech 2024 by it containing a new pensions schemes bill.

So at the very least, pensions (as an area) feels high priority for the new government and appears vital to their strategic plans for UK growth. All the parties wanted to increase pension investments into UK markets.

Shades of (Gordon) Brown

To those with elephant-esque memories, it will seem a little ironic since it was Labour and its former chancellor Gordon Brown and his unnoticed raid on pensions that drove down the investment in UK markets within pensions.

To refresh your memory, in 1997, in his first Budget, Brown, the chancellor who imposed IR35 onto the contractor sector, removed the previous 10% tax credit paid on dividends. Some estimate that this single move by Brown has caused £250billion of cumulative losses of returns over the last two decades, and is a key reason that pension funds today hold very little in British shares.

Funny enough (assuming you’ve got a sense of humour, and like a bit of history looking to set repeat itself), Brown had already announced a review into pensions. The then-chancellor had previously suggested a review of default pension funds, more investment into the UK and the pension-saving concept of ‘one pot for life.’

It’s not the first suggestion of Brown’s which is seemingly about to be taken forward, as that’s exactly what the review/bill promised by Starmer will do.

The retirement saving crisis; how much to fund your minimum lifestyle?

Interestingly, just as abundant as the rumours regarding Reeves and pensions, is the coverage of the pension “crisis” – that we’re all not saving enough for retirement. A 2023 report by Scottish Widows found that the chunk of people not on track for even a “minimum” retirement lifestyle has worsened by some 1.2million additional people, increasing from 35% to 38%.

Well, Reeves must tread carefully, as any significant changes to pensions, making an already complicated system more complicated, could further exacerbate this issue. Plus, to achieve their envisioned boost into UK markets, the government needs continued investment into pensions to help with this element of their strategy.

Flat rate tax relief system for pensions, and other ideas

There’s an additional three-fold rumour on pensions that contractors should be aware that the rumour mill is churning out and that’s despite Autum Budget being more than 75 days away.

• A flat rate tax relief system for pensions;
• Reduction to the tax-free cash allowance; and,
• Changes to the tax regime on death

Any of these choices come with huge practical challenges which really deserve full and careful consultation on each.

The government needs to keep sight of the fact that an incentive for us to save for the end of our working lives, to finance our future selves, needs to remain. The trick for Reeves, then, is how she reforms a system so it supports ourselves sufficiently into old age without putting further strain on the exchequer later down the line.

Moving to a flat rate pension system has been floated before.

Chiefly it would benefit basic rate taxpayers, perhaps enhancing the tax relief they receive. But uncomfortably if you’re a high-end contractor, it would penalise higher and additional rate taxpayers.

Pain, costs, disputes

With the number of taxpayers falling into the higher rate threshold over the coming years increasing (due to frozen tax allowances), this would hurt a huge proportion of the population. 

In addition, there is speculation that changes to the tax relief system could end up being costly for the government.

And it would likely raise several issues for them.

For one, out of the tax relief allocated to individuals nearly half is made for final salary or defined benefit pensions, affecting the public sector pensions. Staying in the public sector for a moment, where the chancellor reportedly wants to introduce a ‘Canadian-style,’ private markets-focussed pensions model for local government retirement schemes, there are numerous unresolved pay disputes.

Reeves needs to be careful here not to add to these issues or to exclude public sector employees from changes to the tax relief system which would create further divide between public and private sector employees. 

Final thought

Remember, if you’re a one-person limited company contractor using your annual pension allowance of £60,000, while we have this allowance remains both intact and fairly generous, you may be able to reduce your profits and levels of corporation tax to as little as 19%. Potentially, such a move can save you in the region of £11,400 in taxes, or more if you’re caught in the marginal corporation tax rates.

In short, with the churn of the pensions rumour mill in near overdrive since Reeves entered Number 11, make hay while the sun on tax-free retirement saving continues to shine.