Chancellor Rachel Reeves has decided against increasing taxes on pension contributions in the upcoming budget, following warnings from public sector unions that such a move would negatively impact their members, as reported by The Guardian.
This decision was part of ongoing efforts to address the public finance shortfall. The proposal to cut the 40% tax relief rate for higher earners contributing to pensions could have generated £10bn annually.
However, union leaders argued that nearly a million public sector workers would be affected, undermining recent pay increases secured through government negotiations.
A government source told The Times that raising taxes on public sector workers in this manner would have been “madness.” Meanwhile, the Treasury declined to comment on the budget specifics.
Reeves has been exploring various options to raise revenue while attempting to avoid drastic cuts to public services, which were part of the previous administration’s fiscal plans. Among the measures considered was reducing the higher tax relief rate on pension savings for those earning above £50,270 annually.
A report by the Fabian Society earlier this year suggested introducing a single tax relief rate for all earners, ranging between 20% and 30%. However, this proposal would have disproportionately affected public sector workers, who typically have more generous pension schemes than their private-sector counterparts.
Vishal Sharma, chair of the pensions committee at the British Medical Association, criticised the potential pension changes, stating it would reverse the progress made on public sector pay deals by effectively reducing doctors’ pay through a different route. He warned that such a move could reignite pay disputes across the NHS.
While the pension tax hike has been ruled out, other revenue-generating measures remain on the table, including reducing the tax-free withdrawal limit for pension pots upon retirement. Reeves is also considering changes to capital gains and inheritance tax. One Fabian Society proposal suggests imposing inheritance tax on unspent pension funds, which are currently passed on untaxed.
Treasury officials will continue working on budget plans in the coming weeks, with decisions to be finalised ahead of the October 30th budget announcement. This week, Reeves will need to provide the Office for Budget Responsibility with an outline of her proposed measures to allow the body to prepare a post-measures forecast, which she is expected to receive next Monday.
