Retirees warned that Rachel Reeves could come after tax relief on pension contributions - Expert comments wanted

Countless chancellors have looked at the pension system to see if they can get their sticky fingers on your tax relief. Well, it might be the year one of them does it. Reeves has been looking to see if she can reform the tax relief you get on contributions to a flat rate, opposed to the current system where you get the same amount of tax relief as you would have paid through PAYE. The new system could be more generous for non and basic rate tax payers, but higher and additional rate pension members could be hit hard, and they are the ones who normally make the bigger contributions. The industry has been waiting for this change for years, and it’s only through the complexity of administering the proposed changes that have slowed the desire, but Reeves might have cracked it, and yet again will look to tax the middle income earners.

Any reduction to the tax relief added to pension contributions would certainly mean more revenue/less spending for the Treasury. However, this is a dangerous move in an environment where there's already lower pot sizes, and lower pension savings being made than the government want.

Tax rules can and do change, so our advice is to make the most of opportunities while they are available.

If Reeves is considering cuts to pension tax relief—particularly via the introduction of a flat rate of let’s say 30%—this would represent a substantial structural change in how the UK incentivises retirement saving. For basic-rate taxpayers, it would offer a more generous uplift from 20% to 30%, potentially encouraging greater contributions and improving pension adequacy among lower earners. Whereas for higher- and additional-rate taxpayers, it would amount to a material reduction in the value of their current tax relief (from 40%/45% down to 30%). In practice, this would act as a stealth tax on higher earners — a politically safer and a sneakier way to increase tax revenue from those already contributing disproportionately to the Exchequer, without explicitly raising income tax rates. That said, even at 30%, pension contributions may remain preferable to high-risk vehicles such as a VCT or EIS.

Cutting pension tax relief may raise short-term revenue, but it risks discouraging long-term saving and increasing future reliance on the state. It could prove both politically unpopular and fiscally short-sighted, something Reeves’ opponents will likely seize on.