Chancellor Rachel Reeves confronts a formidable £22 billion fiscal shortfall as she prepares to deliver Labour's second autumn Budget today, with pension taxation emerging as a potential target for revenue-raising measures.
The £22 Billion Challenge
Pre-Budget research from the Institute for Fiscal Studies reveals the chancellor must find at least £22 billion next month as rising borrowing costs and weak growth forecasts severely limit her options. The Treasury's difficult position has been acknowledged by Reeves herself, who warned she would not be making "easy choices" during today's fiscal event on 26 November.
Despite previous commitments, Number 10 appears less concrete about protecting "working people" from tax increases, though officials have ruled out changes to headline rates of income tax, VAT, or national insurance contributions. This leaves the government searching for revenue through more targeted taxation adjustments.
Pension Policy Under Scrutiny
Economists increasingly predict that changes to property and capital gains taxes might feature in the Budget, but many also anticipate potential reforms to pension policy. The speculation comes despite pushback from pensions minister Torsten Bell, who recently told the Social Market Foundation's pensions conference: "We should always be looking ahead with pension policy."
Bell, who also serves on the chancellor's Treasury team, declined to rule out specific policies when questioned by The Independent, instead choosing not to comment on Budget speculation. The uncertainty follows last year's significant pension policy change, which will subject defined contribution pensions to inheritance tax for the first time from April 2027.
Savers React to Budget Uncertainty
Pension providers report that the persistent speculation about potential tax changes is already affecting savers' behaviour. Financial Conduct Authority data shows pension withdrawals increased by 36% in 2024/25, rising from £52.2 billion to £70.9 billion.
Investment platform AJ Bell confirms it has observed pension savers adjusting their plans due to Budget speculation. The company has launched a petition calling for a Pension Tax Lock, which would commit the government not to reduce tax-free withdrawal amounts or tax relief on pension contributions.
Tom Selby, AJ Bell's director of public policy, expressed concern about the impact of constant speculation: "Why should I lock my money up for decades if there is a risk the goalposts will be moved?"
Potential Pension Tax Changes
With the chancellor's final decision remaining unknown, several pension-related options could generate significant revenue:
Cutting higher rates of tax relief: The current system provides 20% relief for basic rate taxpayers, 40% for higher rate, and 45% for additional rate earners. A flat rate of 20% for all taxpayers could generate approximately £15 billion annually, primarily from top earners.
Abolishing or capping the 25% tax-free lump sum: Under existing rules, individuals can take a quarter of their private pension tax-free, up to £268,275. Capping this closer to £100,000 could recover around £2 billion yearly, with the IFS noting that 70% of this relief currently benefits the wealthiest fifth of earners.
These options align with the chancellor's recent comments to The Guardian, where she indicated that tax rises on the wealthy would be "part of the story" at the Budget, despite previously ruling out a wealth tax. However, former pensions minister Steve Webb has warned that such changes could adversely affect public sector workers and prove politically damaging.
