A significant tax increase on pensions, potentially yielding billions, could be implemented if Shabana Mahmood were appointed Chancellor, according to recent commentary. Mahmood, currently a leading candidate for the position, has previously advocated for reducing pension tax relief for higher earners as a means to fund government spending.
This proposal to cut tax relief on pensions has been identified as one of the few substantial revenue-raising options available to the Treasury, though Chancellors have historically been hesitant to enact such measures. Mahmood expressed support for this approach during a parliamentary debate in February 2015, when she was a shadow Treasury minister under former Labour leader Ed Miliband. At the time, she stated that restricting pension tax relief, alongside a tax on bankers' bonuses, would fund a compulsory jobs guarantee.
The Institute for Fiscal Studies estimates that capping pension tax relief at the basic rate of 20 percent could generate as much as £22 billion annually by 2029. However, the same think-tank cautioned in a report preceding last year's Budget that such a measure 'should be avoided' due to its potential impact on millions of public sector workers, including teachers and nurses.
Robert Jenrick, a Reform UK Treasury spokesman, expressed concern, stating that Mahmood 'has form' on supporting a tax raid on pensions and that "savers should be worried." He further commented, "Shabana Mahmood has long dreamed of taxing people's pensions. This is not a tax on the super-rich – they will restructure around it within a week. It is a tax on the nurse, the teacher and the police officer who spent their careers building a pension they were promised would be theirs. They deserve to know, before the Budget and not after it, whether the incoming chancellor still believes what she said."
Under the current system, pension contributions are not taxed at the point of contribution; taxes are only applied when funds are withdrawn from the pension. Experts have warned that reducing pension tax relief could discourage individuals from saving into their pensions and disproportionately affect public sector employees with pension schemes.