Reeves ‘tax grab’ could hit millions and cost some taxpayers £4,300 | Personal Finance | Finance
High earners could be stripped of thousands of pounds in pension tax relief under Treasury proposals said to be under consideration by Chancellor Rachel Reeves.
Plans reportedly being circulated within Whitehall would see the current tiered system of pension tax relief replaced with a single flat rate of 30%, in what experts say would be a multi-billion-pound raid on higher earners.
The move would affect 6.1 million higher and additional rate taxpayers – around 11% of the UK workforce – who currently enjoy relief of 40% or 45% on contributions to their pensions. The change could slash their annual tax advantage by up to £2,600.
It comes after figures released by wealth advisers Evelyn Partners revealed that a record £54.2billion in pension tax relief was handed out in 2023-24 – with 68% of this going to higher earners. The firm warned the system has become a “prime target” for the new Chancellor.
“Rachel Reeves has already made clear her desire to review reliefs and allowances and target them more effectively,” said Evelyn Partners’ group financial planning director, Jason Hollands.
“Given the very substantial cost of pensions tax relief, it is not surprising that it is back in the spotlight.”
Under the current regime, a higher-rate taxpayer only needs to put in £60 to have £100 go into their pension, thanks to 40% tax relief. In contrast, a basic-rate taxpayer must contribute £80 for the same result.
A new flat rate would mean all earners contribute £70 to receive £100 in their pension – a rise in support for 85% of workers, who currently get just 20% relief. This could boost their tax benefit by around £230 a year.
The Institute for Fiscal Studies (IFS) estimates the reforms would result in a net tax rise of £2.7 billion – overwhelmingly paid by the top 20% of earners. The top 10% would face an average hit of £4,300 a year.
Some campaigners have gone further, calling for tax relief to be cut to a uniform 20% – a move that would amount to a £15.1 billion tax grab, equal to a 2p increase in the basic rate of income tax.
Rachel Reeves has long backed reform of pension tax breaks. In 2018, as chair of the Business Select Committee, she wrote: “Forty per cent of UK wealth is held in private pension funds. To combat this inequality, higher rate pensions contribution reliefs could be restricted.”
Two years earlier she proposed a flat rate of 33%. But experts warn the proposals could backfire and damage long-term savings.
Sir Steve Webb, former pensions minister and partner at consultants LCP, said: “Giving everyone the same rate of tax relief on their pension contributions might seem fair, but it would be extremely complex to implement for the millions of workers in traditional salary-related pension schemes.
“The bulk of contributions in such schemes comes from employers and are made without any deduction of tax.
“If higher earners lost higher rate tax relief they would potentially face a tax surcharge not just on their personal contributions but also on the contributions their employer makes directly to the scheme. This bill could run into thousands of pounds a year in some cases.”
There are also fears the change would require clamping down on salary sacrifice arrangements – which allow workers and employers to save on tax and National Insurance by diverting earnings straight into pensions.
A Treasury spokesman said: “We have set out the need for economic stability and we have begun fixing the foundations so we can grow our economy and keep taxes, inflation and mortgages as low as possible.”
