UK pensions in crosshairs if Reeves waters down non-doms overhaul

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Pension savings are more likely to end up in Rachel Reeves’ crosshairs in the upcoming Budget if the UK chancellor waters down plans to end non-dom tax perks, industry observers have warned, as the government signalled a possible overhaul of the scheme.

Reeves had been targeting around £1bn a year by shaking up the tax regime for wealthy foreigners living in the UK but domiciled overseas, a move that some advisers have warned could backfire and lead to an exodus of wealth creators from the economy as they ditch the UK for more favourable tax jurisdictions. But on Thursday government officials signalled that the chancellor could reconsider the plan if the financial advantages were negated.

The shift means the chancellor — who has already ruled out rises in income tax and national insurance to fill the £22bn fiscal black hole Labour says it inherited from the previous government — could target other areas to raise funds, particularly pensions, industry observers say.

Capital gains tax and inheritance tax changes were already on the table, said Tom McPhail, a pensions specialist at consultancy Lang Cat, but in the event the government abandons planned changes to non-dom tax rules, “there’s an increased likelihood they’ll do more on pensions”, he said. 

Rumours had already been circulating that the chancellor was planning to target pensions to replenish Treasury coffers. “I think death taxes on pensions look an absolute shoo-in,” McPhail said. Inherited pension wealth has hitherto been largely shielded from IHT.

David Brooks, head of policy and Broadstone, a pensions and employee benefits consultancy, agreed that tightening inheritance tax rules around pensions was “the most likely of all the levers Rachel Reeves has available”. 

“If she is in need of further revenues,” he added, “it may tip the balance on making changes to pensions tax relief.”

I think death taxes on pensions look an absolute shoo-in

The government uses tax relief to incentivise pension saving but is an area long viewed as ripe for reform as the bulk of relief ends of going to higher-rate taxpayers. One possible reform keenly watched by pension specialists is the introduction of a flat rate of relief of, say, 30 per cent, that will target higher-rate taxpayers but benefit those who pay the basic rate. Meanwhile many investors have been rushing to max out pension tax benefits ahead of any possible changes in the October 30 Budget, according to platform providers. 

Nick Nesbitt, partner at Forvis Mazars, said he expected the government might revisit rules on how much most people can save into a pension tax-free each year. In 2023, the Conservative government lifted the standard “annual allowance” to £60,000 from £40,000. “One option for Labour would be to reduce this to £40,000 or even lower,” Nesbitt said. “Doing this, however, will impact doctors and higher paid civil servants as they will see old tax problems resurface, something I imagine Labour will want to avoid.”

Others believe the panic around pensions is overblown. Jon Greer, head of retirement policy at Quilter, pointed out that the non-dom changes were only set to raise a relatively modest sum and targeting pension tax relief would be complex for the government to enact. “Implementing a flat-rate of relief on pensions would take significant time and lead to burdensome administration for pension schemes, HMRC and taxpayers,” he said. 

The blowback from the government’s planned cuts to the winter fuel allowance would also make them think twice about targeting pensioners, Greer said. “Any further changes affecting pensioners are likely to reinforce the belief that the government is targeting them excessively.”

An HM Treasury spokesperson said: “We do not comment on speculation around tax changes outside of fiscal events.”

The government’s bleak economic outlook given in the run-up to the Budget “suggests a lack of foresight in expecting people not to take pre-emptive actions that might harm their long-term financial health”, Greer said. 

Broadstone’s Brooks cautioned pension savers against making any “knee-jerk” moves in anticipation of any changes and that for most working-age people pensions would remain “a hugely tax-efficient vehicle for saving towards later-life”.

“We strongly hope that any changes will not deter savers from making adequate financial contributions to support their retirement.”

Additional reporting by Emma Agyemang