Rachel Reeves, the Shadow Chancellor, is urged to consider a radical shake-up of pensions that could raise at least £10 billion a year. A report by the Fabian Society, a leading left-of-center thinktank, suggests that reducing pension tax relief for better-off earners could help fill half of the £22 billion shortfall in public finances identified by the Chancellor. Tax relief on pension contributions was worth £66 billion in 2022-23, a 55% increase since 2016-17.
However, the relief is skewed towards higher earners, with upper- and top-rate taxpayers accounting for only 19% of those paying tax but receiving an estimated 53% of the pension tax relief. In contrast, only 35% of the relief went to women. Andrew Harrop, the General Secretary of the Fabian Society and author of the report, outlined several options for Reeves to consider, which could collectively raise at least £10 billion a year:
– Creating a single flat rate of tax relief for individual and employer pension contributions across all tax bands.
– Levying employee national insurance on employer pension contributions, with a higher government top-up on the first £7,500 of annual pension savings.
Considering pension tax relief reforms
– Reducing the maximum tax-free lump sum to the lower of £100,000 or 25% of pension wealth.
– Fairly taxing the inheritance of pensions by subjecting them to inheritance tax and levying income tax on all inherited pensions. – Charging employee national insurance on private pension incomes with an allowance to exclude small pensions in exchange for canceling the forthcoming cut to winter fuel payment. Harrop emphasized the need for reform, stating, “Pension tax relief is costly and unequal.
It costs the exchequer over £60 billion a year, and more than half this money goes to higher- and top-rate taxpayers. With massive pressure on the public finances, the UK cannot afford to maintain such a costly and poorly targeted system.”
As the Budget approaches, Reeves is expected to raise revenue while safeguarding family living standards and adhering to Labour’s manifesto pledges. The proposed reforms to pension tax relief aim to save money and redistribute support from wealthy individuals to low—and middle-earners.
