Five ways Rachel Reeves could launch a tax raid on pensions

Telegraph

19 hours ago

Before Rachel Reeves's first spending review, a palpable sense of trepidation had spread across Britain.
During her 11 months in office, few have emerged unscathed from the Chancellor's quest to plug the £22bn black hole she claims to have inherited from the Conservatives.
Just weeks after Labour's election win, millions of pensioners watched on powerlessly as their winter fuel payments were snatched away, before a spectacular about-turn was finally confirmed this month.
In her first Budget last October, she also unleashed a £40bn tax raid that put businesses, farmers and retirement savers firmly in the firing line.
During her latest visit to the despatch box, she began with the choices she'd made to 'fix the foundations of our economy' before unveiling billions more in spending. Her opposite number, shadow chancellor Mel Stride, immediately branded it the 'spend now, tax later' review.
Once the blows were traded in Parliament, however, experts were quick to predict that the only way to pay for her promises was through tax hikes.
With Ms Reeves theoretically bound by Labour's manifesto promise not to increase income tax, National Insurance or VAT on 'working people', she will need to raise revenue elsewhere.
Here, Telegraph Money outlines five ways the Chancellor could tax your pension to balance the books.
Meddling with tax relief
As a backbencher, Ms Reeves argued for a 33pc flat rate of tax relief.
Rachel Vahey, of wealth manager AJ Bell, said it was an area the Chancellor could target, and that a tax lock was needed to ward off tax raids.
She said: 'Pensions are incredibly tax efficient. They need to be to encourage people to put away their money today and invest it long term. But people shouldn't have to make long-term decisions in the face of increasing speculation.
'Instead we need certainty on pensions tax, so we're calling for a pensions tax lock – a commitment from Government that the current pension tax rules will stick, at least for this Parliament.'
Calum Cooper, of Hymans Robertson, agreed that a flat rate of tax relief was one place the Chancellor was likely to look, but warned it came with political risks.
He said: 'An alternative that's gaining quiet traction in policy circles is a shift in the timing of tax relief. Under a new system, individuals could contribute out of post-tax income and receive a government top-up, with pensions then exempt from income tax on withdrawal.
'The effect is fiscally similar and has no impact on take-home pay or take-home pensions, but it provides the Treasury with £22bn-plus more cash to invest in the short term by taxing income now rather than later.'
Taking aim at tax-free cash
Currently, pensions usually come with the option to take up to 25pc in cash tax-free up to a maximum of £268,275. Some experts fear that the Chancellor could look to make changes and target high earners.
Rob Morgan, of investment manager Charles Stanley, said: 'I have a niggling concern that the tax-free cash limit is, operationally, a lever that's quite easy to pull.
'There is the potential to set a higher or lower cash limit fairly easily and target those with larger pension pots without disturbing the '25pc tax-free cash for most people' narrative.
'If the tax-free cash limit stays frozen, this would provide another example of the fiscal drag that governments are so fond of and it would raise some extra revenue. But it could also be reduced by any politician looking in envy at the amount being released tax-free from defined contribution pots.'
Decimating salary sacrifice
Currently, workers can sacrifice part of their wages to be paid into their pension. This is exempt from both income tax and National Insurance, fuelling their pension pot and boosting their retirement.
However, millions could be at risk of a stealth tax raid after HMRC funded research into changing the rules. Under one scenario examined, exemptions for both income tax and National Insurance could be scrapped, costing the average earner more than £500 a year.
Former pensions minister, Sir Steve Webb, said the research put a potential tax raid 'firmly on the agenda', while Jonathan Watts-Lay, a financial wellbeing specialist, said it would cause people pain either 'now or in retirement'.
Shrinking the pensions annual allowance
Currently, savers can put up to £60,000 or their annual salary, whichever is higher, into their pension each year before facing a tax charge. They can also take advantage of any unused allowance from the previous three tax years.
However, it was only £40,000 as recently as 2023 before then-chancellor Jeremy Hunt increased it.
Mr Morgan said that one alternative to restricting salary sacrifice would be tightening the annual allowance or carry forward rules – or both.
He added: 'Carry forward is much used by those with lumpy earnings from year to year or have a need to 'catch up' on their pension savings – and it could be devastating for a small minority.
'However, one suspects that it could be one of those incisively targeted moves that isn't beyond the realm of possibility.'
Andrew Tully, of Nucleus Financial, said: 'Such a change may also impact the ability or willingness of some public sector workers, such as senior doctors, to take on additional work.'
Hitting employers with a second National Insurance raid
In the Budget, businesses were hit with a £25bn tax grab through an increase in National Insurance contributions for staff.
The hike, from 13.8pc to 15pc, has already led to a seven-year low in job vacancies outside the pandemic, while data has also suggested it marked the death of the pay rise.
However, the Chancellor could go one step further and charge employers National Insurance on their pension contributions. According to the Institute for Fiscal Studies, this could raise £17bn.
Mr Tully said: 'This is a tax on employers so it may be less obvious to employees, although the impact is likely to hit employees in terms of lower pension contributions or lower salaries if employer costs rise.
'It will also have a negative impact on growth if employer costs grow, so it may not be attractive to a Government which is putting UK growth front and centre of its strategy.'