Chancellor Rachel Reeves is preparing significant tax changes that could impact millions of state pensioners and workers in her upcoming Autumn Budget scheduled for November 26.
Major Tax Measures Under Consideration
According to reports from The Times, Ms Reeves has informed the Office for Budget Responsibility (OBR) about her intention to increase personal tax as part of several major measures planned for the late-November budget. The fiscal watchdog is preparing an impact assessment of these proposals for Treasury review ahead of the budget announcement.
The proposed changes come despite internal party concerns, with newly elected Labour deputy leader Lucy Powell publicly urging the government against tax hikes that could damage public trust in politics.
Key Budget Proposals Affecting Pensioners
The Chancellor is reportedly considering a dual approach to taxation that would see a 2p rise in income tax alongside a 2p cut in national insurance. However, the national insurance reduction would be limited to individuals earning below £50,270 annually, while those above this threshold would continue paying the current rate.
Another significant measure involves cracking down on salary sacrifice schemes. Under the proposed changes, employees would need to pay the full national insurance rate on any savings exceeding £2,000. This could result in an annual pay reduction of approximately £240 for workers contributing 10% of their salary to such schemes, potentially raising up to £2 billion yearly for Treasury coffers.
Pension Reforms and Fiscal Drag
The budget may also target pension lump-sum withdrawals. Currently, retirees can withdraw 25% of their pension pot tax-free, but this allowance could face reductions under the new proposals.
Additionally, the Chancellor is considering extending the freeze on income tax bands originally implemented by the Conservative government in 2021. While this freeze was scheduled to end in 2028, it could now be prolonged until 2030, effectively creating what wealth manager Rathbones' senior financial planning director Ade Babatunde describes as taxation by stealth where fixed rates capture more income as wages rise.
Financial analysis from Royal London indicates that a worker earning £35,000 annually could potentially see their pension pot grow by an additional £679 per year without reducing take-home pay, assuming employers contribute half of their national insurance savings.
