Rachel Reeves, the UK Chancellor, is facing pressure to address the country’s significant spending gap. One potential avenue for closing this gap involves re-evaluating tax reliefs associated with pension savings, which currently amount to over £50 billion. A considerable portion of this relief benefits wealthier individuals, particularly baby boomers and higher-paid Generation X, who may continue to save regardless of state support.
One proposed reform is to restructure pension subsidies by reducing the higher tax rate free allowance from 40% to a flat rate of 25%. This change could yield an additional £10 billion to £20 billion in income tax and national insurance revenues, depending on how the new system is set up. Additionally, Reeves could consider modifying or eliminating the tax-free allowance that permits retirees to withdraw a quarter of their pension pots as a lump sum without tax implications.
Recent data reveals a spike in pension withdrawals, with £18.1 billion taken out in the year ending March, a significant increase from £11.25 billion the previous year. This uptick is attributed to concerns about potential reforms that might limit such tax-free access.
However, a unified approach to reforming taxes, including pensions and council tax, remains elusive. Various think tanks and academic institutions have differing opinions about which taxes are most in need of reform. John Muellbauer from Oxford University has suggested overhauling council tax to base it on property values, potentially raising up to £10 billion without disadvantaging local councils.
While there are multiple proposals on the table, including those targeting capital gains and stamp duties, the lack of broad support could hinder significant changes from being implemented. As Reeves prepares for the upcoming autumn budget, the challenge lies in forging consensus on an effective reform strategy to address the public finances.
Source: https://www.theguardian.com/politics/2025/sep/06/rachel-reeves-50bn-problem-solved-stop-pension-tax-relief