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With Labour’s second autumn budget fast approaching, speculation about further tax rises has intensified.
The Chancellor may need to find at least £22 billion next month, pre-budget research from honorable Found the Institute for Fiscal Studies (IFS)Because rising borrowing costs and weak growth forecasts have significantly reduced its room for manoeuvre.
Making matters more complicated for the Treasury is Labour’s continued commitment to Don’t raise taxes on “working people” – meaning no increase in the main rates of income tax, VAT or national insurance contributions.
with these three The biggest base of tax revenue closedThe Chancellor has less room to raise revenue, making it more likely that she will choose among a variety of changes to taxation.
change in how Wealth and capital gains are taxed This has now been predicted by many economists, but some have also predicted that changes in pension policy may appear.
Speaking in September, pension Minister Torsten Bell opposed the idea, saying: “We must always look forward with pension policy.”
“If you ever find yourself making changes to pension policy to fix a problem that’s happening now, you’re in the wrong business,” the MP told the Social Market Foundation’s pensions conference.
However, the former Resolution Foundation chief – who is also part of the Chancellor’s Treasury team – refused to rule out any policies, instead declining to comment. Budget Estimate.
A major change in pension policy was also shown in last year’s Budget, when it was announced that defined contribution pensions would be subject to inheritance. Tax For the first time from April 2027.
Budget uncertainty alters pension savings plans
Uncertainty over the future of the pensions landscape is now having a profound impact on savers, providers are warning, as many rush to change their plans to get ahead of the anticipated changes.
Data from the Financial Conduct Authority shows pension withdrawals are set to rise by 36 per cent in 2024/25, from £52.2 billion to £70.9 billion.
Investment platform AJ Bell agrees, saying it has seen pension savers adjusting their plans due to budget speculation, and has launched a petition calling on the government to introduce 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, public policy director at AJ Bell, said: “Constant speculation about the future of the pension tax incentive damages people’s confidence in saving for retirement. Why should I lock up my money for decades if there is a risk that the goalposts will be moved?”
With the Chancellor’s final decision remaining uncertain, here are the most likely options he should choose for pension targets:
cut high rates of tax relief
Pension tax relief effectively boosts savers’ contributions with a top-up from HMRC.
Savers paying basic rate tax get a 20 per cent boost to their pension contributions, while higher rate taxpayers get 40 per cent and additional rate earners get 45 per cent.
The scheme effectively ensures that no tax is paid on pension contributions. It is designed to encourage people to save more for retirement, because income that would be taxed as a salary may actually be tax-free as pension deposits.
The proposal would cut this relief for higher earners, meaning everyone would get pension tax relief at the same rate of 20 per cent, regardless of their income tax bracket.
An IFS report last year found it would bring £15 billion more to the Exchequer a year, “the bulk of which will come from those in the top fifth of earners”.
Eliminate or limit the 25 percent tax-free lump sum
Under current rules, people take a quarter of their personal pension tax-free, up to a maximum of £268,275.
Its estimated annual cost is £5.5 billion, with the IFS previously finding that 70 per cent of the relief goes to pensions held by the top fifth of earners.
The influential think tank said it could be replaced, amounting to around £100,000. The researchers found that while this could set back around £2 billion per year, “the losses would be concentrated among the relatively wealthy”.
Either of these options could wash well with the Chancellor, who told Guardian Tax hikes on the wealthy will be “part of the story” in the Budget on Wednesday, after dismissing the possibility of considering a wealth tax.
However, Pensions Minister Steve Webb warned last month that both of these policy changes would have an adverse impact on public sector workers and would potentially be politically damaging.