More than seven million people could be in line for higher taxes on their pension savings if a stealth rise being promoted by Treasury officials were adopted by Rachel Reeves in her first Budget.
Civil servants are understood to be keen on restricting the amount of tax relief workers can claim on the money they pay into a pension.
The Chancellor has not yet begun the process of considering what measures to include in the Budget which is likely to take place in October, according to Government sources.
She is expected to wait until after the publication of a public spending audit next week which will show how much extra money needs to be raised to avoid cuts to services in future.
Treasury officials have pushed for a cap on pension tax relief of no more than 30 per cent, according to The Daily Telegraph. The measure was previously rejected by Jeremy Hunt, and pensions experts have urged the new Chancellor not to revive it.
If the cap did come into force, it would affect anyone paying the higher or additional rate of income tax – totalling more than seven million people by the next general election, according to projections from the Office for Budget Responsibility (OBR).
This represents a rise of around one million people now due to fiscal drag, by which more people are pulled into higher tax brackets as wages rise.
The Treasury and No 10 have refused to comment on any possible Budget measures. A Treasury spokesman said: “We have set out the need for economic stability and we have begun fixing the foundations so we can grow our economy and keep taxes, inflation and mortgages as low as possible.”
Ms Reeves has repeatedly said she wants to reduce the overall tax burden, but refused to rule out raising the level of any specific tax other than income tax, VAT and national insurance.
Currently workers can make pension contributions directly from their salaries without being taxed on those payments – whether their own marginal rate of income tax is 20, 40 or 45 per cent.
Capping the relief at 30 per cent would mean that higher-rate taxpayers would effectively pay 10 per cent tax on their pension contributions, with those on the additional rate paying 15 per cent.
A former Treasury adviser said: “It’s a long-standing ask from officials to raise revenue and make the system more progressive. But it is always knocked down, especially given the numbers of people impacted on the higher-rate band, which increases every year.”
Helen Morrissey, the head of retirement analysis at Hargreaves Lansdown, warned that the measure would reduce the nation’s saving rate, saying: “Tax relief is such a huge incentive to save into a pension and there’s a chance that any changes could mean people paying the higher rates of tax are less likely to pile money into their pension.”
Tom Selby of AJ Bell added: “These rumours come up ahead of every Budget and it never happens, I suspect because every government realises the very real practical and political challenges reforms like this would throw up. This would all also run completely counter to the wider efforts to boost long-term investing, including in the UK.”
He also warned that it would be difficult to implement for defined-benefit pensions – like those given to many public-sector workers – and potentially require large tax charges on recipients that they could not avoid.