How to raise £10,000,000,000

With a ‘black hole’ of £22 billion to fill, there are plenty of groups giving Rachel Reeves advice.

The Fabian Society published a report on taxation on August Bank Holiday Monday. While their main audience is in Scotland, which has its summer at the start of August rather than the end, the timing was unusual. Nevertheless, that was the date chosen by the Fabian Society to release Expensive and Unequal. The case for reforming pension tax (2024).

The Fabian Society is one of the Labour Party’s original founders and remains an affiliate to this day. Like several other left-leaning think tanks, post-election post-election what it says has suddenly started to attract more attention. This is especially true on the tax issue ahead of the Budget on the 30^{th of} October.

The Society’s pension proposals are wide-ranging, but all of them have appeared before in one form or another. Taken together, the Society suggests that they could raise £10 billion a year. To put that into context, the controversial decision to means-test Winter Fuel Payments will save about £1.5 billion a year in 2025/26.

The most significant element of the proposals is the introduction of a flat-rate tax credit to replace income tax relief on pension contributions. This idea was once allegedly considered by George Osborne, the former Conservative chancellor. For example:

• At present, a higher-rate taxpayer (42% in Scotland, 40% elsewhere in the UK) pays £60 (£58 in Scotland) to add £100 to their pension.
• Alternatively, the Fabian Society suggests a personal contribution of £75 from net income would receive a £25 government tax credit, bringing the total to £100. This is similar to a Lifetime Individual Savings Account.

Such a reform would benefit most taxpayers, who would see the net cost of their own pension contributions drop. It would also reduce the tax benefit given to higher and additional rate taxpayers, who according to the most recent HMTC calculations (for 2022/23) receive just over half of all pension contributions tax relief.

Most of the Fabian Society’s tax-raising ideas were likely already under consideration by the Treasury. Regardless of whether they are included in the Budget on 30^th October, they are worth noting if you are contemplating topping up your pension.

Find out more about the Fabian Society’s report here.