Rachel Reeves has reportedly dropped plans for a pension tax raid, amid Treasury concerns that it would penalise up to a million public sector workers.

Senior officials from the department told the Chancellor that cutting the 40 per cent tax relief on higher earners would have a disproportionate impact on public sector workers on modest incomes.

One government figure told The Times that imposing a tax rise on those working for the state, such as nurses and teachers, would be “madness” after having agreed significant pay rises.

It comes only weeks before the Chancellor’s first Budget in office on Oct 30, which Sir Keir Starmer warned the public would be “painful”.

There had been reports that Ms Reeves was considering a proposal for a flat 30 per cent rate of pension tax relief, so that higher rate payers would pay an effective 10 per cent tax charge on their retirement contributions.

Pension contributions are tax deductible, which means that basic rate payers receive relief equal to 20 per cent of their payments to cancel out the income tax that would otherwise be due.

Higher rate payers – those earning more than £50,270 – receive relief of 40 per cent, and most additional rate payers earning more than £125,140 are given 45 per cent.

The Times reported that the rumoured changes would lead to a nurse on £50,000 to face an additional £1,000 a year on their tax bill.

The current rules cost the Exchequer more than £50 billion a year through income tax relief, corporation tax relief, zero tax on the growth in pensions and the fact that employers do not have to pay National Insurance on employer pension contributions.

Latest in series of about-turns

This move appears to be the latest in a series of about-turns by Ms Reeves since entering No11, including a possible softening of her pledge to crack down on non-doms.

This was as a result of Treasury officials’ concern that too many wealthy foreigners will be pushed out of the UK and it will ultimately fail to raise any money.

Last week, it was revealed that Labour is poised to abandon plans to tax investors, after it discovered the policy could have a “net cost to the Exchequer”.

The Chancellor is battling a series of stand-offs over the Budget as Cabinet ministers rail against the spending efficiencies demanded by the Treasury.

The health and education departments have been ordered to find savings of at least £1 billion each, despite a Labour vow that there would be no return to austerity.

One of the first measures ordered by the Treasury as it tightens its belt is the stripping of the universal winter fuel payment, which caused major tensions among some MPs.

‘Taking money from doctors’

Speculation surrounding what other changes Ms Reeves will make later this month include increasing capital gains tax and an inheritance tax raid.

But the speculated pension tax raid appears to have been abandoned as a result of warnings to the Chancellor of the effect on public sector workers.

Vishal Sharma, the chairman of the British Medical Association’s pensions committee, told The Times: “The last year has seen a number of pay deals across different groups of doctors begin to make progress at turning these pay cuts around.

“Attacking our pensions in this way would completely reverse this progress by once again taking money away from doctors in a different way.

“Not only would this negate the recent hard-won pay rises but it would likely reignite the recent pay disputes that have been seen across the NHS.”