According to a warning from Goldman Sachs, Rachel Reeves may target the pensions of high earners by eliminating generous tax reliefs in next month’s Budget.
The Wall Street bank indicated that the Chancellor would need to increase taxes by “at least” £15 billion to £20 billion in October’s Budget, with pensions likely to be a major focus.
Goldman Sachs suggested that implementing a flat rate of 20% tax relief on pension contributions could cover £15 billion of the deficit in Britain’s finances, describing this “small measure” as potentially leading to a “sizeable” tax increase by Ms. Reeves.
Pensions tax relief has long been considered a potential area for cuts by Ms. Reeves and other Chancellors to generate additional revenue.
In a 2016 article, Ms. Reeves argued that a flat rate of 33% pensions tax relief would provide “a welcome boost for basic-rate taxpayers and reduce the savings subsidy for higher earners.”
Sir Keir Starmer has already acknowledged that the upcoming Budget will be “painful,” as stated last month. Labour has ruled out raising taxes on “working people” during the election campaign, which is generally seen as excluding increases in income tax and national insurance.
To tackle the £22 billion shortfall, the bank suggested that the Chancellor may consider scrapping certain inheritance tax reliefs, reforming capital gains tax, and adjusting tax reliefs on pension contributions.
Currently, savers receive a 20% tax relief on pension contributions, with an additional 20% available for higher earners. Introducing a flat rate of tax relief would effectively eliminate this extra relief for higher earners.
According to Treasury analysis, aligning capital gains tax rates with income tax could generate an additional £1.5 billion in revenue for the Exchequer. Meanwhile, removing inheritance tax relief on estates valued under £325,000 would bring in £1.8 billion.
In a 2016 interview with the Sunday Times, Ms. Reeves was asked which part of the tax system she would change. She responded, “Pensions tax. I would make it fairer. Pensions tax relief seems to be geared towards the highest earners.”
In an article published eight years ago in The Times, Reeves criticized the current tax relief system as an “unjust and ill-judged use of the nation’s strained finances.” She proposed a flat rate of 33%, which she claimed could increase the pension pot of an average-wage earner by up to £15,000 over their working life.
Reeves stated: “It would be simpler, fairer, and an important step towards boosting retirement savings… This would be a welcome boost for basic-rate taxpayers and a reduction in the savings subsidy for higher earners, while still rewarding savings.”
She suggested that tax relief could be rebranded as a government-backed savings scheme: “For every £2 that savers put towards their pensions, the Government would contribute another £1—a huge incentive to save for everyone.”
Former Chancellors Rishi Sunak and George Osborne have reportedly also considered a flat-rate pensions tax relief.
