Burnham told to consider means-testing state pension to fill defence blackhole

Means-testing the state pension could help fill the defence budget blackhole left behind by Keir Starmer – but would be “unjust”, a leading tax expert has said.

In a list of 37 options given help fund Sir Keir’s Defence Improvement Plan, tax expert Dan Niedle said the move barring the wealthiest would raise around £1bn.

But he said any chancellor would be unlikely to do this because while looking like “a slam dunk” it “just feels unjust” and would represent 10 per cent of many people’s wealth.

Instead, the top suggestion from Mr Neidle is to continue the fiscal drag on things like freezing income tax thresholds so more people are included in the higher rates of 40p and 45p as well as the basic rate of 20p.

Mr Neidle said: “A pension of £12,500 per year, updated with the ‘triple lock’, is actually a highly valuable asset.

“It would cost the average 66-year old somewhere over £250,000 to buy an asset like that. A family ‘just’ in the wealthiest 1 per cent has average assets of £1.9m per adult. So removing their pension would effectively expropriate over 10 per cent of their wealth. That feels unjust. I doubt any chancellor would do this.”

Means testing he state pension would break the link between it being a universal benefit funded by National Insurance which was established when David Lloyd-George created it in 1908.

Mr Burnham has ruled out breaking Labour’s 2024 manifesto promise to not raise income tax, VAT or personal contributions to National Insurance, which in theory fund the state pension.

He has discussed changing business rates in a way which would target large online retailers like Amazon that rely on huge warehouses.

But he has also recommitted to the triple lock on the state pension rising each year by 2.5 per cent or the highest rate of inflation which adds to the burden of the bill.

However, he has to find at least £4.7bn to fund the black hole in the defence package and may need to find another £13bn if he is to meet the amount which military chiefs claim is required to prepare the UK for an increasingly dangerous world.

Listing means-testing the state pension as option 37, Mr Neidle noted: “The state pension pays out about £12,500 per year. It’s easy to think that’s an irrelevant amount to wealthy retirees, and we should means-test the pension to stop them benefiting.

“Given the government spends over £150bn each year on pensioner benefits, blocking even just the wealthiest 1 per cent from pensions would raise over £1bn. It seems a slam dunk.”

The top suggestion from Mr Neidle is to continue the fiscal drag on things like freezing income tax thresholds so more people are included in the higher rates of 40p and 45p as well as the basic rate of 20p.

“Inflation and earnings growth mean we’re all earning more in cash terms, but not in real terms – however tax thresholds have stayed the same for years. The Johnson and then Sunak governments raised very large amounts with fiscal drag – over £29bn by 2027/28. This has only a limited effect on median earners, but represented a significant tax increase for higher earners. Rachel Reeves extended the freeze to April 2031. It seems likely that we will get another extension from Mr Burnham, raising around £5bn in 2031/32 and more in subsequent years.”

Mr Neidle also suggested that a proposal aired by one of Mr Burnham’s key lieutenants Louise Haigh recently of raising capital gains tax could bring in £6bn.

He noted: “It’s obvious from the charts above that capital gains tax is the single largest way to raise tax without breaking pre-election promises.”

But he warned: “However, it comes with a large catch. A simple rate increase will, on the basis of HMRC figures, lose revenue, not raise it.”

Other suggestions include an exit tax for wealthy people leaving the UK, capital gains tax on top of inheritance tax when people die, an increase in inheritance tax and forcing law firms to start paying employer national insurance. Currently they are exempt because lawyers have partner not employee status.

He also wants Mr Burnham to look at eliminating the loophole on stamp duty for commercial property, introducing a tax for large gifts and force the Bank of England to stop paying interest on its own reserves.