Chancellor urged to drop means-tested winter fuel payment and cut pension tax relief

Chancellor, Rachel Reeves, has been urged to use October’s budget to reform pension tax relief, after a report from the Fabian Society found that this could raise up to £10bn, "significantly" more than the plans to means test winter fuel allowance.

Reeves previously announced that the government would be changing winter fuel allowance payments for pensioners, except for those on pension credit or other means-tested benefits, as a result of a '£20bn black hole’ in public finances.

However, the Fabian Society’s report suggested that cuts to pension tax relief would raise “significantly” more than the chancellor’s plan to means test the winter fuel allowance and would protect people on low and middle incomes.

It also argued that the current pensions tax system is "very expensive and very unequal", noting that whilst almost all workers receive far more in tax relief on their pension contributions and investments than they can expect to pay in tax on their pension income, this is especially true for high earners.

It also noted that more than half (53 per cent) of tax relief in 2022/23 went to upper and top rate taxpayers who make up just 19 per cent of employee taxpayers, while just over a third (35 per cent) of tax relief on pension contributions went to women.

Given this, the report encouraged the government to create a single flat rate of tax relief for individual and employer pension contributions for all tax bands, such as 25p or 30p per pound of gross income, rather than giving more back to higher and top rate taxpayers.

In addition to this, it said the government could reduce the maximum tax-free lump sum to the lower of £100,000 or 25 per cent of pension wealth, or look to subject pensions to inheritance tax and levying income tax on all inherited pensions.

It also said that the government could charge employee national insurance on private pension incomes (with an allowance to exclude small pensions) in exchange for cancelling the forthcoming cut to winter fuel payment.

The final proposal was to raise taxes on existing pensioners.

Whilst the group acknowledged that this was also the most controversial proposal, it argued that it is a "much better option" than scrapping winter fuel payment, estimating that while means-testing the winter fuel payment could reduce the incomes of over 10 million people, levying national insurance on larger private pensions would affect around 3 million wealthy pensioners.

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