Is the Chancellor eyeing cuts to pension tax relief?
In her recent Commons address, Chancellor Rachel Reeves warned of “difficult decisions” about tax in the upcoming October Budget, to tackle a £22 billion fiscal black hole.
Could costly pension tax reliefs be in the firing line?
Pension tax reliefs have cost the government £189 billion between 2019/20 and 2022/23. The cost has been growing, reaching a record £48.7 billion in 2022/23, according to newly released HMRC figures. This exceeds the annual budgets of the police, law courts, prisons, and fire services combined.
One reason for this increase is the ongoing freeze in tax bands. The relief on eligible pension contributions is tied to income tax rates. So, as the freeze has pushed record numbers into higher tax bands, the cost of pension tax reliefs has ballooned.
If nothing changes, the bill will continue to creep up amid the ongoing freeze.
If, however, the current system of reliefs were replaced with a flat rate of 30%, the Exchequer could save £2.7 billion per year, closing more than 10% of the black hole, according to estimates from the Institute for Fiscal Studies.
Could this make cuts to pension tax reliefs too tempting to ignore? How does the current system of reliefs work, and what could a 30% flat rate relief on pensions mean for savers? What might you consider if you’re concerned about possible cuts to tax relief?
Please note: this article gives a very concise overview of complex rules and doesn’t cover all scenarios or exceptions – for example, it does not cover the tax relief position in Scotland, nor the rules for defined benefit pensions. If you are unsure how the rules may apply to you, please seek specialist advice. Tax rules can change and benefits depend on circumstances.
Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Pensions are long-term investments: you cannot normally access your funds before age 55 (57 from 2028). Before making any contributions you should check you are eligible.
How much could a cut to pension tax relief cost you?
Under current rules, most UK individuals under age 75 should be able to benefit from tax relief of up to 45% on pension contributions.
When you contribute £8,000 to a pension, the government automatically adds £2,000 (20%). Higher and top-rate taxpayers can claim back up to an extra 20% or 25% respectively. The higher your income tax rate, the more tax relief you could receive.
If the current system were replaced with a flat 30% relief, basic rate (20%) taxpayers would see their contributions enhanced, while higher (40%) and top-rate (45%) taxpayers would lose out.
Currently, a £60,000 pension contribution effectively costs a higher rate taxpayer £36,000 and an additional rate taxpayer £33,000 after full relief. With flat 30% relief, these taxpayers would lose £6,000 and £9,000 of tax relief respectively, increasing the effective cost to £42,000.
You can see more examples in the tables below.
| Payment | Total invested (gross contribution) | Current maximum tax relief (20%) | Maximum tax relief @ 30% flat rate | Gain/loss with 30% flat rate |
| £2,880* | £3,600 | £720 | £1,080 | £360 gain |
| £8,000 | £10,000 | £2,000 | £3,000 | £1,000 gain |
| £16,000 | £20,000 | £4,000 | £6,000 | £2,000 gain |
*This is the maximum contribution for non-earners.
Tax rules can change and benefits depend on circumstances. This table assumes the maximum rate of relief under current rules is available on the whole contribution. Basic rate tax relief of 20% is automatically added. Please note: in most cases, you can contribute as much as you earn to pensions this tax year, capped at £60,000. However, non-earners, higher earners and people who have used the pension freedoms since 2015 may be subject to different allowances.
| Payment | Total invested (gross contribution) | Current maximum tax relief (40%) | Maximum tax relief @ 30% flat rate | Gain/loss with 30% flat rate |
| £8,000 | £10,000 | £4,000 | £3,000 | £1,000 loss |
| £16,000 | £20,000 | £8,000 | £6,000 | £2,000 loss |
| £48,000 | £60,000 | £24,000 | £18,000 | £6,000 loss |
Tax rules can change and benefits depend on circumstances. This table assumes the maximum rate of relief under current rules is available on the whole contribution. Basic rate tax relief of 20% is automatically added. Higher and top-rate taxpayers can claim back up to an extra 20% or 25% in tax relief respectively via their tax return. Please note: in most cases, you can contribute as much as you earn to pensions this tax year, capped at £60,000. However, non-earners, higher earners and people who have used the pension freedoms since 2015 may be subject to different allowances.
| Payment | Total invested (gross contributions) | Current maximum tax relief (45%) | Maximum tax relief @ 30% flat rate | Gain/loss with 30% flat rate |
| £8,000 | £10,000 | £4,500 | £2,500 | £2,000 loss |
| £16,000 | £20,000 | £9,000 | £5,000 | £4,000 loss |
| £48,000 | £60,000 | £27,000 | £18,000 | £9,000 loss |
Tax rules can change and benefits depend on circumstances. This table assumes the maximum rate of relief under current rules is available on the whole contribution. Basic rate tax relief of 20% is automatically added. Higher and top-rate taxpayers can claim back up to an extra 20% or 25% in tax relief respectively via their tax return. Please note: in most cases, you can contribute as much as you earn to pensions this tax year, capped at £60,000. However, non-earners, higher earners and people who have used the pension freedoms since 2015 may be subject to different allowances.
A higher-rate taxpayer could find themselves £10,000 out of pocket if they contributed £20,000 gross to their pension each year for five years, while a basic-rate taxpayer would gain by the same amount.
While there is no certainty on what changes, if any, Ms Reeves may make, some wealthier investors might consider it prudent to maximise contributions while the current rules and reliefs still apply. Recent changes, such as the abolition of the lifetime allowance, could also make it easier for some to contribute more to their pensions.
But if you decide to maximise your pension contributions now, where could you turn?
Investment ideas for your pension
Once you decide to contribute to a pension, the next question is probably where to invest.
We have two ready-made investment ideas for you to consider: the Quality Shares Portfolio and the Wealth Club Portfolio Service. Both are designed specifically for wealthier and more experienced investors and are exclusive to Wealth Club. We manage the portfolios for you but the service is not personal investment advice.
Note: these discretionary managed portfolios are long-term investments which can fall as well as rise in value and returns are not guaranteed. Currently, these two ideas are not available if you are in drawdown or intend to take benefits from the pension soon, however we are working on making these options available.
Quality Shares Portfolio
The Quality Shares Portfolio, managed by Charlie Huggins, gives you exposure to 15-20 global businesses chosen by him for their resilience, financial strength and pricing power.
It is profoundly different from any other investment you might hold in two key respects. The first is the level of information, insight and transparency it provides. The second is in the investing approach itself.
You can invest in the Quality Shares Portfolio via the Wealth Club SIPP (Self Invested Personal Pension), from just £10,000 (gross).
Wealth Club Portfolio Service
The Wealth Club Portfolio Service is a collection of five well diversified investment portfolios we manage for you based on the level of risk you choose for yourself.
Each portfolio includes a diverse mix of 30–45 actively managed and low-cost index funds as well as investment trusts. They give you exposure to equities and bonds from around the world, but also infrastructure and other private assets – we are not aware of any similar service that can match this.
They are the type of portfolio a private bank or wealth manager might build for you – but without the hefty price tag. In fact, you could pay around 40% less than you would if you used an adviser and roughly the same if managing a typical fund portfolio yourself on a DIY platform.
You can invest in the Wealth Club Portfolio Service via the Wealth Club SIPP. The minimum investment in aggregate (across SIPP, ISA and GIA) is £100,000.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.