UK Treasury’s Pension Tax Raid: Millions Face Higher Bills in Sweeping Reform Plans

Growing Pressure on Pension Savings

Chancellor Rachel Reeves is examining cuts to tax-free pension lump sums in a major reform that could save over £2bn annually, as the Treasury seeks to address a £50bn hole in public finances.

The Treasury is considering reducing pension tax relief from 40% to 20% for higher earners, a measure that could generate approximately £15 billion in revenue. This comes as rising inflation and economic deceleration have led to funding shortfalls potentially reaching £31 billion, with the UK’s tax burden already approaching historic peaks following October’s £41 billion revenue package.

Impact on Pensioners

Millions of pensioners relying solely on the state pension face an unprecedented tax burden as early as next year. The personal allowance remains fixed at £12,570 until at least 2028, while the state pension, currently paying up to £11,973 annually to 12.9 million recipients over 66, is set to breach this threshold. With average earnings growing at 5.2%, the triple-lock mechanism will push next year’s state pension above the income tax threshold for the first time in over a century.

Pensioners are being warned of a significant tax shock on their savings in the years ahead. Recent analysis shows older savers face a dramatic rise in taxed interest, with pensioners set to hand over £2.5 billion in savings tax this financial year – a staggering 215% increase compared to 2022-23, according to HMRC figures obtained through a Freedom of Information request.

Administrative Challenges and Concerns

Former pensions minister Baroness Altmann has raised serious concerns about the administrative challenges ahead, noting that many elderly people have never completed a tax return or paid tax themselves. She describes the situation as “a serious potential administrative nightmare for many elderly pensioners, and also for HM Revenue & Customs (HMRC).”

Future Outlook

Sir Steve Webb, former pensions minister and current partner at pension consultants LCP, has called for greater clarity, stating “We really don’t want more rounds of speculation before every Budget,” and urging for “a clear commitment to leave pension tax relief alone for the lifetime of the Parliament.”