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UK Funds Risk Tax Hit for Underinvesting at Home, Official Warns

  • UK Funds Risk Tax Hit for Underinvesting at Home, Official Warns
  • UK Funds Risk Tax Hit for Underinvesting at Home, Official Warns
  • UK Funds Risk Tax Hit for Underinvesting at Home, Official Warns
  • UK Funds Risk Tax Hit for Underinvesting at Home, Official Warns
Philip Aldrick
5 min read

(Bloomberg) -- The UK could claw back pension tax breaks from asset managers that fail to invest enough domestically, the head of the British Business Bank said in a warning about the stakes for the industry as the government pursues a key growth initiative.

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Louis Taylor, effectively a government official in his role as chief executive of the state-owned lender, insisted that he was not endorsing the idea but pointing out how the government can boost funding for growth-enhancing projects at no cost to taxpayers and without resorting to full compulsion. The industry prefers Australian-style tax reliefs to incentivize investment.

Prime Minister Keir Starmer is counting on the private sector to deliver the faster growth his new Labour administration has promised. Funds deemed to be investing too little in the UK are under scrutiny because they already gain considerably from tax relief on worker pension contributions, which boosts assets under management.

So far, the government has stopped short of setting minimum allocations to UK assets but Pensions Minister Emma Reynolds this week refused to rule out more draconian measures.

“We’re not talking about it for now, but let’s see where we get to,” Reynolds told the Financial Times when asked about the controversial step of mandation. “Investment in pensions is, as you know, very generously provided for in terms of tax relief.”

In an interview with Bloomberg before Reynolds’ comments were published, Taylor said that rather than providing additional tax breaks, the government could instead strip funds of some of the benefit they currently receive.

“It is open to the exchequer to say, unless your scheme has invested a proportion in the UK, we will recoup the tax benefit you’ve got. You could recoup it from the pension plan,” he said. “That would be fiscally positive for the Treasury - in the sense that the deduction is happening anyway, but anything they claim back is a positive.”

Pension contributions are deducted from earnings before they are taxed, in a relief worth around £50 billion ($63 billion) a year at a time when the public finances are stretched. For a basic-rate taxpayer, it amounts 20% relief on contributions and 45% for a top-rate taxpayer. A levy on pension funds that underinvest in the UK would not quite amount to mandation because they could still invest overseas if they judged doing so outweighed the cost of higher taxes.

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