With a ‘black hole’ of £22 billion to fill, there are plenty of groups giving Rachel Reeves advice.
The Fabian Society published a report on taxation on August Bank Holiday Monday. While their main audience is in Scotland, which has its summer bank holiday at the start of August rather than at the end, the timing was unusual. Nevertheless, that was the date chosen by the Fabian Society to release Expensive and Unequal. The case for reforming pension tax (2024).
The Fabian Society is one of the Labour party’s original founders and remains an affiliate to this day. Like several other left-leaning think tanks, post-election what it says has suddenly started to attract more attention. This is especially true on the issue of tax ahead of the Budget on 30 October.
The Society’s pension proposals are wide-ranging, but all of them have appeared before in one form or another. Taken together, the Society suggests that they could raise £10 billion a year. To put that in context, the controversial decision to means-test Winter Fuel Payments will save about £1.5 billion a year in 2025/26.
The most significant element of the proposals is the introduction of a flat rate tax credit to replace income tax relief on pension contributions. This idea was once allegedly considered by George Osborne, the former Conservative chancellor. For example:
- At present, a higher-rate taxpayer (42% in Scotland, 40% elsewhere in the UK) pays £60 (£58 in Scotland) to add £100 to their pension.
- Alternatively, the Fabian Society suggests a personal contribution of £75 from net income would receive a £25 government tax credit, bringing the total to £100. This is similar to a Lifetime Individual Savings Account which receives a £20 credit on an £80 contribution.
Such a reform would benefit most taxpayers, who would see the net cost of their pension contributions drop. It would also reduce the tax benefit given to higher and additional rate taxpayers, who according to the most recent HMRC calculations (for 2022/23) receive just over half of all pension contribution tax relief.
Most of the Fabian Society’s tax-raising ideas were likely already under consideration by the Treasury. Regardless of whether they are included in the Budget on 30 October, they are worth noting if you are contemplating topping up your pension.
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
Content correct at the time of writing.