Rishi Sunak and Jeremy Hunt plan to reveal a stealth tax raid on pensions later this month, as they push to balance the books and reassure the markets.
The Telegraph has learnt that the pension lifetime allowance is set to be frozen for two more years, with a rise in line with prices delayed from 2025 to 2027.
It means two million savers now face tax charges of up to 55 per cent on their retirement funds by the end of that period, according to expert analysis.
The approach comes with the future of the pensions triple lock, which guarantees that state pensions rise by 2.5 per cent, earnings or inflation – whichever is higher – still hanging in the balance.
The extended freeze is expected to hit private sector savers more than public sector workers, given Treasury calculations for the lifetime allowance are more generous for the latter group.
There are signs of discontent on the Tory benches that the Government is disproportionately targeting savers as it attempts to bring down borrowing via spending cuts and tax rises.
The Telegraph revealed on Friday how the Treasury is looking at increasing capital gains tax rates and allowances, prompting some criticism from Tory backbenchers.
Since the Tories entered Downing Street in 2010, squeezes on pension tax relief have been the second biggest source of increases to the tax burden, according to the Institute for Fiscal Studies think tank.
It has also emerged that electric vehicles are set to be charged VAT for the first time. However, on Friday, No 10 moved to promise that the Sizewell C nuclear power station, in Suffolk, would still be funded after reports that it was in the Treasury crosshairs.
‘Economics of the madhouse’
Baroness Altmann, who was Tory pensions minister under David Cameron, said further freezing the lifetime allowance could inadvertently encourage public sector workers to take early retirement.
She said: “People in the NHS and other parts of the public sector will increasingly be driven to retire early, rather than work longer like we need them to.
“That is because tax rules that were meant to be a workplace benefit are becoming a workplace penalty. This is the economics of the madhouse.”
Mr Sunak and Mr Hunt need to fill a fiscal black hole of around £50 billion at the Autumn Statement on Nov 17. They have agreed to split the cost roughly equally between spending cuts and tax rises.
Treasury sources have spelled out the broad approach to The Telegraph. The Prime Minister and Chancellor do not want to break 2019 Tory election manifesto promises or raise the rates of major taxes.
They are also determined to make sure the well-off carry more of the burden for the tax rises than the poorest – and want that to be clear in impact assessments of their measures.
It means much of their focus has fallen on changing tax thresholds – when people start paying certain taxes – and allowances – the amounts people can earn tax free.
The pension lifetime allowance is £1,073,100. Savings over that limit are taxed at 55 per cent if the money is taken as a lump sum, or at 25 per cent plus your income tax rate if taken out gradually.
It means £100,000 of savings above the threshold withdrawn at once would trigger a £55,000 tax bill.
Untouched pension pots that exceed the lifetime allowance are taxed at 25 per cent above the threshold on the saver’s 75th birthday.
In the past, the allowance level has risen with prices – meaning that savers do not lose out if inflation is soaring, as it is currently.
But last year, as chancellor, Mr Sunak froze the allowance until 2025.
The move was forecast to bring the Treasury close to a billion pounds over the period, because as prices rise more people’s savings go over the allowance, leading to new tax bills.
The Treasury is preparing to announce that the freeze will be extended until 2027, the end of the five-year period for which plans will be produced.
Such a change is often dubbed a “stealth tax”, because it results in more people paying tax, even though the overall rate of tax is not increasing.
