Rachel Reeves has ‘no plans’ to revisit UK pension tax

UK shadow chancellor Rachel Reeves has “no plans” to revive her previous call for a tax increase on the pension savings of higher earners, but has refused to categorically rule out such a move.

Prime Minister Rishi Sunak claimed in a fractious television debate with Labour leader Sir Keir Starmer on Tuesday that the opposition party would put up taxes and economists believe that whoever is the chancellor after July 4 could be tempted to increase revenues.

Reeves has already ruled out increases in income tax, corporation tax, national insurance and value added tax, leading to speculation about what other tax levers she might pull if she becomes chancellor.

Her spokesperson said Reeves had “no plans” to change the current regime of pension tax relief, even though earlier in her career she proposed reforms that would increase taxes on pension savings by higher earners.

“That’s not a Labour policy — we have no plans to change pension tax relief,” the spokesperson added. “It will not be in our manifesto. It’s not something we are looking at and we have no plans to introduce it.”

However, her spokesperson declined to rule out any future changes to the regime. Labour insiders said it would be a “dead end” if ministers were forced to exclude every possible tax change in future.

Starmer said in Tuesday’s debate that Labour’s plans did not require higher taxes, other than ones already set out, including VAT on private school fees and closing private equity tax loopholes.

In 2016 Reeves — a backbench MP at the time but a former shadow work and pensions minister — proposed setting a “flat rate of pension tax relief” at 33 per cent, below the 40 per cent tax rate paid by higher earners.

“This would be a welcome boost for basic rate taxpayers and a cut in the savings subsidy for higher earners, while still rewarding savings,” she said at the time. She repeated her enthusiasm for restricting pension tax relief in 2018.

Currently, when people and their employers pay into a pension, their contributions are exempt from taxation up to a set annual limit.  

When savings are later withdrawn as pension payments, these are taxed like other income, with people able to usually take up to 25 per cent as a tax-free lump sum, up to a maximum of £268,275.  

The system — which enables people to enjoy tax breaks on pension savings at their marginal tax rate — has seen the nation’s top earners receive more than half of the £67.3bn of tax relief provided on pensions in 2020-21, according to HM Revenue & Customs.

Labour has already pledged to reintroduce the “lifetime allowance” — the cap on what can be saved in a pension and benefit from tax relief. The allowance was scrapped by chancellor Jeremy Hunt in April, in a move that was roundly welcomed by wealthier retirement savers with funds of more than £1mn.

This week, the Institute for Fiscal Studies urged Reeves to go further to rein in “overly generous” pension tax breaks for the wealthy, beyond simply reinstating the lifetime allowance, although it does not favour restricting upfront tax relief.

Carl Emmerson, deputy director of the think-tank, said having a single rate of tax relief set at the basic income tax rate of 20 per cent would raise £15bn for the Treasury, while at 30 per cent it would raise about £3bn. If a single rate was set at 32 per cent, it would be revenue neutral.

On Sunday, Hunt claimed Reeves would target pension savings to raise revenue, noting that former Labour chancellor Gordon Brown made a 1997 tax grab on pensions through the abolition of the tax credit on dividends.

Emmerson said: “I can see why there’s speculation about pension tax relief because it’s one of those areas with big pound signs attached.” But he said such a move would carry heavy practical and political risks.