Last week the new UK chancellor, Rachel Reeves, reported that the financial situation inherited from the outgoing Government was worse than expected and tax rises would be required in the autumn budget to plug what she said was a £22bn hole in the public finances. A figure strongly contested by the outgoing chancellor, says Steve Berridge, technical services manager at IFGL Pensions.

Having again ruled out increases to income tax, national insurance and VAT, she has not ruled out changes to capital gains tax, inheritance tax, or reforming tax relief on pensions.

The question now will be how she makes changes without breaking the manifesto promise of not increasing taxes on working people during this parliament.

Changes to capital gains tax would in one sense be no surprise, because it has long been highlighted that the level of tax on so called “unearned income” in the UK is lower than it is with earned income. A reduction in the top level of capital gains tax on property in April from 28% to 24% only reinforced the view. However, the annual allowance has been eroded substantially in recent years from £12,300 to £3,000 as at April 2024, so it might prove difficult to make further substantial changes.

Inheritance tax is another one that needs careful navigation. Due to the nil rate band having been frozen since 2009, it is no longer a tax on the rich and people with relatively modest estates can be potentially caught up in its web if they do not plan sufficiently.

One perhaps obvious move would be to remove the current protection pensions enjoy from inheritance tax or at least cap it. It is perhaps surprising that someone with for example, a personal pension worth £5 million, can pass on the entire fund to their beneficiaries with no inheritance tax deduction. An option could be a cap, possibly linked to the new lump sum and death benefit allowance (£1,073,100 ).

Another target might be the current income tax loophole that exists where beneficiaries of someone who died before 75 are able to take income payments with no income tax deduction, regardless of fund size, if they elect the drawdown option, rather than a lump sum.

The tax relief on contributions might be reformed. Tax relief is currently quite generous for higher income individuals. A single tax relief rate of 20% could provide substantial savings. Here again the chancellor needs to balance the need for fiscal prudence with the desperate need for pension provision across society to increase as current Gen X savers move into retirement during the coming decade or so. Any changes will also be complicated because many individuals contribute using salary sacrifice arrangements and benefit from relief at source .

Pension tax relief is the perennial pre-budget rumour, but the fiscal realities this time might mean the rumour mill has more substance.

Alternatively, the chancellor might do well to look at the very generous reliefs afforded to businesses which effectively protect dynastic wealth as it passes down the generations. Currently it is possibly to pass on agricultural land, companies and unquoted shares which have been owned for at least two years, with no inheritance tax liability. The protection for family businesses is laudable, but when the Duke of Westminster can reportedly shield most of a £6 billion fortune from inheritance tax, questions of fairness arise.

One thing is for certain, the October budget will be keenly anticipated by those of us in the pension world and until then, it is worth restating that a pension is a very tax efficient vehicle, avoiding some of the charges which affect alternative investment choices.

Source: FA