Looking Ahead series: Autumn Budget 2024 - article two
“There is a Budget coming in October, and it’s going to be painful.” (Sir Keir Starmer, 27 August 2024)[1]
“I think that we will have to increase taxes in the Budget.” (Rachel Reeves, 30 July 2024) [2]
The Chancellor, Rachel Reeves, will present her first Budget on 30 October. She says this “will involve taking difficult decisions to meet our fiscal rules,” including on tax[3].
Because the fiscal rules will not be precisely defined until the Budget, they can be made less onerous if potential tax rises or spending cuts look too unpalatable[4]. Some features of the new OBR forecast may also make the Chancellor’s task easier[5]. Nonetheless, warnings of a “painful” Budget are unlikely to be mere “expectations management”.
The Prime Minister has said that “those with the broadest shoulders should bear the heavier burden”[6], and changes to pensions taxation could be presented as targeting the better off.
Other articles in this series set out why most potential pension tax changes are easier to talk about than to implement. Here, we outline what the Government has said and try to interpret the main media speculation that has appeared to date.
HM Treasury’s default position ahead of a fiscal event is not to comment on speculation about any tax changes (although with exceptions where even a rumour that something is under consideration is deemed too damaging – see Government briefings that it will not end the single person’s council tax discount). The Chancellor declining to rule out the idea of raising revenue via “pension reform” (an interviewer’s words)[7] is consistent with this, so does not necessarily signify much.
The Chancellor has told MPs that “our manifesto commitment that we will not increase taxes on working people... means that we will not increase national insurance, the basic, higher or additional rates of income tax, or VAT” (emphasis added)[8]. In other words, she does not believe that campaign promises preclude other tax rises affecting working people – such as changes to the tax treatment of money saved for retirement.
This was anyway reasonably clear. During the general election campaign, Labour refused to match Conservative promises not to change pensions taxation, emphasising that they would not need to increase taxes and that they would focus on growing the economy to generate extra resources[9]. The line about tax rises being unnecessary has since been dropped, with the Government blaming its “spending inheritance”.
| Potential tax change | Labour stance during election campaign |
|---|---|
| Changes to tax relief/NI relief on pension contributions | No plans/not needed, but not ruled out |
| Changing tax-free lump sums | Originally just “no plans”. Labour gave a “firm commitment” not to change the current system after Sir Keir Starmer inadvertently suggested that the option to take tax-free cash was due to expire; whether this precludes cutting the £268k maximum was not explicit[10] |
| Lifetime allowance (LTA) | Previous commitment to restore the LTA “immediately” did not make Labour’s manifesto. No commitment not to bring it back. |
| Annual Allowance (AA) | Not mentioned. Previous comments indicated hostility to the March 2023 increases in the AA and to changes in how it is tapered away. |
| Inherited pension wealth | Labour were not asked about this during the campaign. |
Media reports giving the impression that pension tax changes are likely do not appear to have resulted from “kite-flying” (where decision-makers place the story so they can gauge reaction before committing) or leaks.
On 24 July, the Telegraph reported on its front page that the Chancellor was “expected to consider” introducing a flat rate of tax relief on pension contributions, at either 30 per cent or 20 per cent[11]. This was “expected” because HM Treasury officials had presented successive Conservative Chancellors with options, and “sources familiar with the plans” expected this to happen again. This reads as though the sources’ Treasury experience was under the previous Government. A subsequent report on the i’s front page was similarly based on comments from a “former Treasury adviser”[12].
By convention, ministers do not see policy proposals prepared for previous governments, but officials can incorporate similar material into fresh Budget submissions. One example of a new Government accepting a recommendation that had been repeatedly rejected was the 2012 “pasty tax”[13].
On 7 October, The Times reported that ending higher rate tax relief is expected not to happen, and that HM Treasury officials had told the Chancellor that this “would disproportionately hit those of relatively modest incomes who work for the state” (when they had told her this was not reported, so it’s unclear whether this was being properly considered until recently). Government sources were quoted describing the idea of doing something with these consequences as “madness” and saying that the effect of public sector workers would be taken it account[14]. One of the Times report’s authors went further when summarising the report on X, posting that: “Rachel Reeves will not mount a tax raid on pension savings amid warnings that it would unfairly penalise up to a million teachers, nurses and other public sector workers”[15].
On 9 October, The Telegraph reported that "government officials have asked one of Britain's top pension providers to assess the impact of cutting the tax-free lump sum to just £100,000"[16]. That wording is consistent with a range of scenarios – conceivably, officials (and not necessarily HM Treasury officials, based on the report) could just have asked a question after the provider mentioned the speculation at a meeting. In any case, because the limit on tax-free cash applies across all of an individual’s pension savings rather than per pot, a single provider’s data may be of limited use in assessing the impact. The Telegraph report added that “a source” said the Government was looking at think tank recommendations; it did not specify that this was a source inside Government.
Pension providers have reported that speculation about Budget measures has prompted some customers to increase contributions while higher rate relief is still available and others to take tax-free cash before it is cut[17]. In the first case, the Government loses revenue in the short term; in the second, it potentially gains revenue, depending on how withdrawn sums are used (more may be spent and, if not, tax-free investment roll-up may be lost because not all of a lump sum can be accommodated within the individual’s ISA allowance; though in other cases, it may simply clear mortgage debt). It may therefore be more content to let speculation about tax-free cash run even if nothing were being considered.
