Labour’s public sector pension tax break risks wave of legal action

labour’s public sector pension tax break risks wave of legal action

Starmer

Labour risks triggering a wave of legal challengers if it goes ahead with plans to shield public sector leaders from a pension tax raid, the retirement industry has warned.

The party is planning to reimpose the maximum cap on the amount that can be saved into pensions tax free, above which savings are taxed at rates of up to 55pc. This cap is known as the “lifetime allowance”.

It was scrapped by Jeremy Hunt after public sector workers such as senior doctors quit the NHS over large tax bills.

The party has said drawing up plans to reintroduce the cap “in a way that ensures we retain public sector leaders”, as well as senior NHS doctors, after Sir Keir Starmer pledged to bring it back.

Critics have said the plan would be unfair to those in the private sector and reward public sector workers already in receipt of some of the most generous retirement benefits.

The pensions industry has now warned it could spark a wave of legal challenges from disgruntled private sector workers who may not benefit from the planned reforms.

Joe Dabrowski, of the Pensions and Lifetime Savings Association, a trade body, said: “Applying the lifetime allowance in different ways could introduce elements of unfairness that would be challenged in the courts.

“It may be too difficult to apply the cap depending on what type of work an individual does,” he said. “If you are in the public sector, would you be exempted only if you stayed in it forever? The reality is people move jobs – what do you do then?

“The tax system is highly complicated as it stands and adding more complexity is unlikely to be helpful.”

Jon Greer, of the wealth manager Quilter, said Labour’s approach could wedge a divide between private and public sector workers.

“The tax system should treat everyone equally, and from experience, the moment you make exemptions, complexity increases exponentially,” he said. “If you allow exemptions for certain sectors, the implication suggests a valuation of wealth by supposed virtue based on your profession, which is fraught with ethical and practical complications.

“This approach risks demonising wealth accumulation in some areas while sanctifying it in others, without a clear rationale beyond the immediate need to retain certain professionals.”

Chancellor Jeremy Hunt scrapped the £1.073m lifetime allowance cap in the spring Budget last year, following pressure from doctors and other high earners in the public sector, who were retiring early to avoid triggering five-figure tax bills.

Immediately after the Budget, Labour pledged to reinstate the cap but said doctors would still be protected to avoid an exodus from the NHS.

Labour has not confirmed whether it would reintroduce the lifetime allowance at its previous level of £1.073m. When the rule was first introduced in 2006, the allowance was £1.5m.

It was raised to £1.8m in 2010, cut to £1.5m, then down to £1.25m and eventually to £1m in 2016. It rose with inflation until 2021 when it was frozen by Rishi Sunak, who was then chancellor.

The reintroduction of the lifetime allowance could affect around 250,000 people, according to analysis by consultancy LCP.

Labour was approached for comment.

It has previously said it is “committed to reintroducing a lifetime allowance and we are looking at different options for how to do this in a fair way”.

“Given the absolute mess that the Tories have left our NHS and public services in after 14 years of chaos, we need to ensure that we retain senior NHS doctors and other public service leaders.

“A key consideration will be ensuring we retain public service leaders – who will be crucial for delivering Labour’s programme of reforms set out in our missions for government.”

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