Is Reeves mounting a pension tax raid at the Budget?
As Labour’s second autumn budget fast approaches, speculation about further tax rises is rife.
The Chancellor may need to come up with at least £22bn next month as rising borrowing costs and weak growth forecasts greatly reduce his room for manoeuvre, according to pre-Budget research by the respected Institute for Fiscal Studies (IFS).
Making matters even more complicated for the Treasury is the Labor Party’s continued commitment not to increase taxes on “working people”; This means no increase in the headline rates of income tax, VAT or national insurance contributions.
With these three largest tax revenue bases closed, the chancellor has fewer places to look to raise revenue, making him more likely to choose from a range of taxation adjustments.
Changes to the taxation of property and capital gains are now predicted by many economists, but some predict changes to pension policy may also occur.
Speaking in September, Pensions Minister Torsten Bell spoke out against the idea, saying: “We must always look forward on pension policy.”
The MP told the Social Market Foundation’s pensions conference: “If you find yourself tweaking a pension policy to solve a problem that’s happening now, then you’re in the wrong business.”
But the former Resolution Foundation chief, who is also part of the Chancellor’s Treasury team, avoided ruling out any policy and instead refused to comment on Budget speculation.
Last year’s Budget also included a significant change in pension policy; It was announced that defined contribution pensions will be subject to inheritance tax for the first time as of April 2027.
Budget uncertainty is changing retirement savings plans
Uncertainty about the future of the retirement landscape is now having a knock-on effect on savers, with many trying to change their plans to avoid speculation, providers warn.
Data from the Financial Conduct Authority shows pension withdrawals rose by 36 per cent in 2024/25, from £52.2bn to £70.9bn.
Investment platform AJ Bell admits it is seeing pension savers adjusting their plans due to Budget speculation and has launched a petition calling on the government to implement a Pension Tax Lock, a commitment not to reduce the amount people can withdraw tax-free from their pensions or the amount of tax relief given on pension contributions.
Tom Selby, director of public policy at AJ Bell, said: “Continuous speculation about the future of pension tax incentives is damaging people’s confidence in saving for retirement. Why would I keep my money locked away for decades if there was a risk of the goalposts moving?”
While the Chancellor’s final decision remains uncertain, the most likely options if he chooses to target the pension are:
Lowering higher tax deduction rates
Pension tax relief, with the addition of HMRC, effectively increases savers’ contributions.
Savers paying basic rate tax get a 20 per cent increase in their pension contributions, while higher rate taxpayers get 40 per cent and those earning additional rate get 45 per cent.
The scheme effectively ensures that no tax is payable on pension contributions. It is designed to encourage people to save more for retirement because income that would be taxed as wages can be used as retirement deposits virtually tax-free.
The proposal calls for cutting this aid for high-income earners; This means everyone gets pension tax relief at a flat rate of 20 per cent, regardless of their income tax bracket.
A report from the IFS last year found this would create £15bn more a year for the Exchequer, with the majority of this coming from the top five earners.
Elimination or capping of the 25 percent tax-free lump sum
Under current rules, people receive a quarter of their private pension tax-free; this amount up to a maximum of £268,275.
This has an estimated annual cost of £5.5bn, with 70 per cent of the benefit going to pension savings for those in the top five, the IFS has previously found.
The influential think tank added that this could be changed, with the amount capped at closer to £100,000. This could claw back around £2bn a year, “with losses relatively concentrated among the wealthy”, the researchers found.
Any of these options might appeal to the Chancellor. Guard Tax increases on the rich will be “part of the story” in the Budget, it was said on Wednesday, after a controversial wealth tax was previously ruled out.
But pensions minister Steve Webb warned last month that both of these policy changes would negatively impact public sector workers and would likely be highly politically damaging.
