Chancellor Rachel Reeves is reportedly mulling a shake-up of pension tax reliefs ahead of the Budget.
Chancellor Rachel Reeves may target pension tax reliefs in the Budget (Image: PA Images)
Rachel Reeves‘ next tax blow has been tipped to include stripping pensioners of a valuable perk.
The Chancellor is believed to be mulling a shake-up of pension tax reliefs in the Budget to help the Government plug a disputed £22billion black hole in the country’s finances this year.
When someone turns 55, they can normally take 25 percent of their pension without having to pay tax up to a £268,275 limit, with the remainder usually liable to be taxed in the same way as other income.
But the Labour Government is being urged to cut the cap on tax-free cash for those with the largest pension pots.
Steven Cameron, Public Affairs Director at wealth manager Aegon, said there is a possibility the Budget could either cap the tax-free lump sum at a much lower amount or reduce the proportion available to 20 percent or so. He explained both moves would increase the tax take.
Rachel Reeves says there’s a £22bn black hole in this year’s public finances she needs to plug (Image: Getty)
Mr Cameron told The Times that to generate extra income tax, those changes would have to apply to pension pots already built up over years or decades.
He continued: “This would be highly controversial, reducing one of the most valued tax incentives that pension savers look forward to.”
The pensions expert said for anyone planning to take their tax-free lump sum soon, it may be worth thinking about taking it before the Budget, which Ms Reeves will deliver on October 30.
However, Mr Cameron cautioned not to take money out of your pension before you need to as other tax benefits would be lost.
The Institute for Fiscal Studies (IFS) think tank has recommended the Chancellor should reduce the lump sum to £100,000, arguing it was hard to justify subsidies for wealthier savers.
Rachel Reeves has already stripped millions of pensioners of winter fuel support (Image: Getty)
By doing so, Ms Reeves could raise some £2billion per year, according to the IFS, which said such a move would impact about one in five retirees.
The think tank cautioned against setting a flat rate of tax relief for pension contributions, City AM reports.
Such a move would be “damaging, complex and inequitable”, according to remarks attributed to the IFS by the same publication.
Ms Reeves has repeatedly warned that there are “more difficult decisions to come” as the government looks to make savings. Millions of pensioners will already suffer from the Government’s decision to means test the winter fuel allowance.
The Treasury has warned more decisions on taxing and spending will be taken “in the round” at the Budget.
