The report by the Fabian Society says tax breaks for pensions have become markedly more expensive for the government and its proposed changes would fill half the £22 billion shortfall the chancellor has identified in the public finances
Rachel Reeves could raise at least £10 billion a year through a radical shake-up of pensions that would make tax relief less generous to better-off earners, according to a leading thinktank.
The report by the Fabian Society says tax breaks for pensions have become markedly more expensive for the government and its proposed changes would fill half the £22 billion shortfall the chancellor has identified in the public finances.
Reeves has dropped strong hints that she is planning a tough, tax-raising budget on 30 October but has said she will not raise income tax, VAT or national insurance.
Andrew Harrop, the general secretary of the Fabians and the author of the report, said Reeves should consider reducing pension tax relief and redistributing it so it is less skewed towards the better-off.
The report says that tax relief on pension contributions was worth £66 billion in 2022-23, a rise of 55% since 2016-17. Tax is paid when individuals take their pensions, but this raised only £22 billion for HMRC in 2023.
Although upper- and top-rate taxpayers account for 19% of those paying tax, they received an estimated 53% of the tax relief on pensions in 2022-23. Little more than a third of the tax relief (35%) went to women.
Harrop said: Pension tax relief is very expensive and very unequal. It costs the exchequer more than £60 billion a year and more than half this money goes to higher- and top-rate taxpayers. With huge pressure on the public finances, the UK cannot afford to maintain such a costly and badly targeted system.
Reeves needs to raise revenue while also safeguarding family living standards and sticking to Labour’s manifesto pledges. As part of her tax-raising October budget she should introduce reforms to pension tax relief that save money and redistribute taxpayer support from the wealthy to low and middle earners, he added.