Rachel Reeves could raise at least £10billion a year reducing pension tax breaks, a thinktank has said.
The change to the pension system could see tax relief being less generous to better-off earners, which could in turn fill the hole in public finances.
Proposed tax changes would fill half the £22billion shortfall the chancellor has identified in the public finances, a report by the Fabian Society said.
Andrew Harrop, General Secretary of the Fabians and the author of the report, explained Reeves should consider reducing pension tax relief and redistributing it so it is less skewed towards the better-off.
As the Budget looms, many people are anticipating raised taxes, spending cuts and a benefits clampdown as the Chancellor looks to build the UK economy.
Strong spending on public services and welfare pushed Government borrowing to £3.1billion last month, more than double its level in the same month a year earlier and worse than experts had expected, according to the latest figures from the Office for National Statistics.
Strong spending on public services and welfare pushed Government borrowing to £3.1billion last month
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As borrowing increases, the Treasury has made it clear that further hard choices would need to be made when Reeves delivers the Budget on October 30.
Tax relief on pension contributions was worth £66billion in 2022-23, an increase of 55 per cent since 2016-17, the report stated.
Tax is paid when individuals take their pensions, but this raised only £22billion for HMRC in 2023.
Despite the top earners only accounting for 19 per cent of those paying tax, they received an estimated 53 per cent of the tax relief on pensions in 2022-23.
And more than a third of the tax relief (35 per cent) went to women.
Harrop continued: “Pension tax relief is very expensive and very unequal. It costs the exchequer over £60billion a year and more than half this money goes to higher- and top-rate taxpayers.
“With huge pressure on the public finances, the UK cannot afford to maintain such a costly and badly targeted system.
“Rachel Reeves needs to raise revenue while also safeguarding family living standards and sticking to Labour’s manifesto pledges.
“As part of her tax-raising October budget, she should introduce reforms to pension tax relief that save money and redistribute taxpayer support from the wealthy to low and middle earners.”
The author explained Reeves had a number of options to make changes – a selection of which would raise at least £10billion a year.
These included:
- Creating a single flat rate of tax relief for individual and employer pension contributions for all tax bands (eg 25p or 30p for each pound of gross income). At the moment, pension tax relief depends on an individual’s marginal tax band.
- Levy employee national insurance on employer pension contributions in exchange for a higher government top-up on the first £7,500 of annual pension savings.
LATEST DEVELOPMENTS:
- Reduce the maximum tax-free lump sum to the lower of £100,000 or 25 per cent of pension wealth. At present, the tax-free lump sum can be in excess of £250,000.
- Fairly tax the inheritance of pensions by subjecting pensions to inheritance tax and levying income tax on all inherited pensions.
- Charge employee national insurance on private pension incomes (with an allowance to exclude small pensions) in exchange for cancelling the forthcoming cut to winter fuel payment.
