The most likely Budget pension changes, according to the experts ...0

Rumours about what could be in the Autumn Budget are already picking up with many worried about the changes Rachel Reeves could make to people’s pensions.

The Spring Statement on Wednesday didn’t hint at any policy changes or updates, despite analysis showing that retirees whose only income is their state pension could be dragged into the income tax net as early as next April.

But economists have warned pensioners could face a shock tax raid in October’s Budget if the worsening economic forecast fails to improve.

Paul Johnson, director of the Institute for Fiscal Studies (IFS) think-tank, raised concerns in his post-Spring Statement briefing that Reeves hadn’t left herself enough headroom in the public finances to withstand challenges to the economy.

He warned she had left herself exposed to minor forecast changes and that there was a “good chance” she would need to raise taxes in October.

Mr Johnson said: “That risks months of speculation over what those tax rises might be – a raid on pensions, a wealth tax on the richest, another hike to capital gains tax?”

Here, The i Paper lays out all of the potential changes to pensions we could see Reeves make.

The IFS said that extending the freeze on tax thresholds – in place since 2022 and due to end in 2028-29 – by another two years was the “easiest political win”.

That could draw in “something like £10bn at the end of the period, which is pretty helpful”, Mr Johnson said.

Jason Hollands, managing director at Evelyn Partners, agreed, saying this is the most likely option.

Speaking to The i Paper, he said: “This would effectively allow fiscal drag to do the heavy lifting.

“While people would not immediately see a change in their payslips – so politically this has low visibility with voters – it is a form of slow torture as people will be steadily pulled deeper into the higher bands of tax.”

Moving to single rate of upfront tax relief

After proposing to bring unspent pensions into the scope of inheritance tax (IHT) just a few months ago, Reeves has few levers left to pull, Craig Rickman, personal finance expert at interactive investor, said.

If she does decide a further pension tax raid is necessary, moving to a single rate of upfront tax relief of “something like 30 per cent” could be an option.

Currently, people get their entire pension contributions tax free.

A single rate means changing that, probably to make it less generous for higher rate payers, but more generous for basic rate payers.

Mr Rickman said: “This policy would benefit lower earners but penalise anyone who pays 40 per cent or 45 per cent tax.

“As a significant amount of upfront tax relief is dished out at higher rates, it may prove lucrative for the Government, but it would be a complicated policy to introduce and wouldn’t be well received in all quarters – especially as due to fiscal drag, more and more people are tripping into the higher tax bands.

“Getting upfront pension tax relief at your marginal rate – in other words, the rate of tax you pay on the next pound you earn – is becoming more valuable with every passing year.”

Nimesh Shah, chief executive of accountancy firm Blick Rothenberg, added: “The government could reduce the annual allowance [currently £60,000] or take the extreme step to limit pension tax relief to the basic rate of 20 per cent.”

One area that could come under scrutiny is the state pension.

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The biggest proportion of the welfare spending is on pensioners. This is set to rise by 20 per cent to £182bn in 2029-30, mainly driven by an ageing population and the triple-lock guarantee.

By the end of the decade, it’s estimated pensioner spending will be almost 50 per cent of the total welfare bill.

If the Government is looking to cut costs, then spending on pensioners could be something that moves into the Treasury’s crosshairs in the next few years, Rachel Vahey, head of public policy at AJ Bell, said.

She said: “In its manifesto, the Labour Party pledged to protect the triple-lock guarantee, ensuring state pension increases match earnings or inflation if above 2.5 per cent.

“But how long they can keep these promises remains to be seen. Once the state pension rises by 4.1 per cent next month it will be at a level perilously close to the personal allowance of £12,570 and should overtake it in a couple of years if things continue, thanks to frozen tax thresholds.

“At that point, the Government will have a huge decision to make.”

Options to change the state pension include means testing and moving to a “double-lock”, which removes the 2.5 per cent guarantee and links state pension increases solely to inflation and earnings.

Pension tax incentives

The Spring Statement avoided the usual pre-Budget speculation about the future of pensions tax-free cash and broader retirement savings incentives – namely pensions tax relief.

However, the grim growth outlook, tight public finances and self-imposed constraints on raising income tax, VAT and national insurance mean those rumours will not doubt surface once again ahead of the main fiscal event later this year.

Tom Selby, director of public policy at AJ Bell, said: “We saw before the autumn Budget the impact this can have on people’s behaviour, causing a significant spike in savers making retirement decisions, such as accessing their tax-free cash, due to fears the Chancellor’s axe could be wielded.

“Making long-term financial decisions based on fear is clearly not a good outcome and each time these rumours raise their ugly head, damage is done to people’s trust in pensions.”

Rather than waiting for that to happen, the Chancellor should commit to a Pensions Tax Lock, he said, ruling out changes to tax-free cash or tax relief for at least the rest of this Parliament.

He added: “This would allow Reeves to say she is on the side of savers and retirees, providing millions of Brits with the stability they crave to plan for the long-term.

“If the Chancellor really wants to build a retail investing revolution in the UK, providing a bit of certainty over the pensions tax rules would be a good place to start.

“Assuming the Government has no intention of fundamentally reforming pension tax relief or scrapping tax-free cash – reforms which would cause a huge furore across the public sector and result in higher tax bills for NHS staff – this commitment would demonstrate the Government is on the side of diligent savers and retirees, without costing the Treasury a penny.”

Rowan Morrow-McDade, a tax adviser, said: “The Government could bring back in the Lifetime Allowance – the maximum you can have in your pension in a tax efficient manner.

“At present, there is no limit to how much you can have in your pension, as the limit was scrapped by the Tories. Labour pledged to reintroduce it, but U-turned on this in June 2024.”

Change to National Insurance contributions

Companies can currently pay into employees’ pensions without National Insurance contributions.

Reeves might change these rules so she can collect the new, higher 15 per cent Employers’ contributions on company contributions, Mr Morrow-McDade said.

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