Rachel Reeves could close the UK's spending gap by targeting pension tax relief and council tax, according to a new analysis. The chancellor currently gives away over £50bn in tax relief for pension saving, mostly benefiting wealthier baby boomers and better-paid Gen Xers who would save anyway with more limited state support.
Reforming pension subsidies by cutting the 40p higher rate to a flat 25p for all savers could claw back £10bn to £20bn in extra income tax and national insurance. Additionally, reducing or scrapping the tax-free lump sum allowance on retirement savings could raise further revenue. The tax-free cash privilege has been criticised as indiscriminate, benefiting those who already have more money.
Fears of reform have already sparked a rush of older savers withdrawing pension cash. Figures from the Financial Conduct Authority show individuals withdrew £18.1bn in the year to March, up from £11.25bn the previous year, with most withdrawals occurring after Labour's need for higher revenue became clear.
Separately, Oxford University's John Muellbauer proposes overhauling council tax, which is based on outdated property values. He suggests a 0.5% levy on properties in the top two bands (G and H), raising up to £10bn. This would tax a £10m home at about £50,000 annually instead of the current £3,000-£4,000. Older homeowners could defer payments with a small surcharge.
The Treasury faces a lack of consensus on tax reform, with no royal commission or follow-up to the 2010-11 Mirrlees Review. Muellbauer's proposal offers a phased approach to modernise council tax while addressing the immediate budget shortfall.
