Chancellor could plunder tax cuts on pension savings of 6 million higher earners, warns Steve Webb

Rachel Reeves is eyeing an attack on the pension savings accounts of up to six million higher earners after figures showed the cost of tax cuts has soared.

Analysis ahead of Keir Starmer’s dour speech on the economy found the net cost of pension tax cuts rose by £1.1bn on the previous year to £48.7bn in 2022/23.

About 55 per cent of the relief related to high-income earners with salaries between £50,271 and £125,140, ​​and a further 7 per cent to higher-income earners with salaries of £125,140 or more.

Sir Steve Webb, pensions columnist for This is Money and a former pensions minister, said the figures show why the Chancellor is likely to tap into the pension savings accounts of higher earners at her first budget on October 30.

The figures, which show more workers will face higher tax rates, were released before the Prime Minister warned of short-term problems in the upcoming Budget.

Keir Starmer was seen as laying the groundwork for tax rises. And with Labour pledging not to raise income tax, national insurance, VAT or corporation tax rates, it is likely that other ways of raising revenue will be addressed.

However, experts warn that changing tax breaks for pensions would be complicated, could hamper retirement savings and hit younger workers’ savings accounts harder in the long run.

High-tax taxpayers hit by such an attack on their pension pots could include senior public sector workers such as doctors in the NHS, senior teachers and civil servants.

Sir Steve, now a partner at pensions consultancy LCP, which carried out the analysis, said: ‘There is no doubt that the Chancellor will be keeping an eye on the high costs associated with cutting tax on pension contributions.’

Ms Reeves is expected to consider a proposal from Treasury officials for a flat 30 per cent rate for pension tax relief.

The Treasury has long wanted to raise taxes on pension savings to raise much-needed revenue, but successive finance ministers have rejected the plan.

Ms Reeves is also expected to look at increases in inheritance tax and capital gains tax to plug the £22bn “black hole” in the public finances she says has been left by the Tories.

Tom Selby, director of public policy at AJ Bell, said there had been much speculation about higher pension rates before the Budget, but the introduction of a lower flat rate could cause major problems, particularly in the public sector.

He said: ‘At the extreme end of the scale, this measure could see everyone’s pension tax relief capped at the basic rate of 20 per cent, with proponents claiming this could generate billions of pounds of extra revenue for the Treasury.

‘But as with most radical changes to pension tax, introducing a flat rate of relief is much easier said than done. Much of the potential savings to the Treasury from a pension tax cut would come from defined benefit schemes, the majority of which are now in the public sector.

‘If a flat rate of less than 40 per cent of pension tax relief were to be applied to these schemes, the only way to ensure that the right level of tax relief was applied to contributions from higher or additional rate taxpayers would be to hit those members with a tax charge that would likely run into thousands of pounds.

‘This would therefore risk creating a major conflict with NHS staff and civil servants, at a time when many public services are already being stretched to the limit.’