2025 – Pensions under pressure as stealth taxes persist

The first Budget of my professional career was the 1988 Nigel Lawson “Giveaway” Budget. As an office junior, my job was to head into the city and queue up (with dozens of other fresh faced office juniors) to receive the printed full Budget from the Government’s press offices. I dutifully returned to work, clutching it in my sweaty palms, so that the senior advisers could pore over it. No internet, no leaks, just a bundle of white pages hastily stapled together.

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Since that March day (it always used to be in the Spring) Budgets have come and gone but they all have one thing in common. Namely, the fear and rumour that ferments in the days and weeks beforehand. I have to say that the media are one of the major guilty parties and, more than ever, are responsible for whipping up a frenzy of bitterness and resentment, even before the Chancellor, whoever they happen to be, has stepped up to the dispatch box.

I don’t think I’m wrong in saying that I’ve never witnessed quite so much ‘bracing’ in fear and anticipation as this Budget. The nation became paralysed in apocalyptic fear as if the end of the world were approaching.

So, I thought it was time to take stock and look at the Budget in the clear light of day and also in the context of historical Budgets.

The fear and rumour mill

Ever since that dreary March day in 1988, I can say that one fear has pervaded every single Budget. Namely, the fear that higher rate tax relief will be removed from pension contributions. This Budget was, of course, no exception and the fear spread even further than that. About sometime in September this year, a rumour started (I don’t know from where) that tax free cash (now technically known as the Pension Commencement Lump Sum, or PCLS) would be reduced from £268,275 to £40,000. Personally, I thought it was unlikely and wasn’t afraid to say so. Not only would it not result in higher tax take for the Treasury (who in their right mind would now willingly withdraw £286,275, subjecting themselves to income tax on £246,275?) but it would also have made Rachel and Labour, even more unpopular than they are already.

Nevertheless, a huge number of people acted and withdrew their tax free cash and are now sitting on it in a taxable environment.

But pensions were definitely going to take a bullet somehow. After all, they are still highly efficient methods of saving, something which seems to have been lost on some of the general public, based on a tsunami of negative press, again, which doesn’t always help. Animal Farm springs to mind when the animals, having taking over the farm, come up with the tenets of animal life. “Four legs good, two legs bad”. And so, the media has a similar chant “non pensions good, pensions bad”. But are they? If I were to tell you that you could invest in a pension and get 41.6% tax free cash from it, would you be interested? If you are a higher rate taxpayer, this is exactly what you get! For every £100 put in, you only pay £60 (20% tax relief at source and a further 20% back in your tax returns). So, tax free cash at 25% means 25% of £60 which equals 41.6%. When you retire, if you’re a basic rate taxpayer, you are only paying 20% on the £75 whenever you draw on it. By the way, if you make pension contributions and your earnings are between £100,000 and £125,140, because this income reduces your personal allowance, the equivalent tax relief is not 40%, it is 60% so the effective tax free cash rate is a whopping 62.5%.

Given how generous tax relief is, I think that the slight knock pensions took (future reductions in salary sacrifice) is really getting away with it.

The hammer blow came last year

Of course, last year’s Budget delivered a hammerblow to pensions in that, from April 2027, Inheritance Tax (IHT) will apply. For ten years, since George Osborne announced pensions ‘freedom’ many have earmarked their pension funds for Estate Planning purposes, since so this recent news was very unwelcome. In effect, this now puts pensions in roughly the same position as they were before 2015. Before 1995, remember, people were forced to buy annuities with their pension funds so, in spite of goal post moving, pensions are still the best tax planning vehicles around, so let’s not throw the baby out with the bath water.

Overall, it has to be said that the Budget was probably a slight relief. Many, myself included, had expected increases in Capital Gains Tax and even Income Tax and none of these came to pass. Instead, we saw a continued freezing of allowances. Stealth taxes. The death of wealth by a thousand cuts. Each one painless, but in five years’ time, we’re all significantly worse off without immediately feeling the pain. 

Stealth taxes are at the heart of the Budget

There were a few other ‘tampering's’ such as the reduction in cash ISA contributions from £20,000 to £12,000 for under 65s, and an increase to the tax rate on savings interest, both from April 2027, but this is mostly tinkering around the edges and irritants for some, at worst. There was an innovation in the introduction of ‘Mansion tax’ for houses worth over £2m but, again, this was kicked into the future and will not apply until 2028. But the stealth taxes, freezing of allowances, are at the heart of this budget.

I sometimes think of the 1988 “giveaway” Budget with fondness. Lawson reduced higher rate income tax from 60% to 40% and basic rate from 27% to 25%. All of this was possible due to the fact that the economy had been overheating (remember that?) but was now under control and the predicted Budget surplus allowed for such cuts. What luxury! There was uproar in the house and the Speaker had to suspend proceedings due to “grave disorder”. A lesser known MP called Alex Salmond exclaimed that it was an “obscenity” and was duly suspended for breaching Parliamentary convention.

The world has changed though, and the UK doesn’t have the room for manoeuvre afforded by those halcyon days. Nigel Lawson didn’t have the fallout of QE, Brexit, Covid and the Ukraine invasion to hamper him and I doubt if any modern day Chancellor from any persuasion would make us all happy, given the state of the economy. The only one who tried, and failed, was Kwasi Kwarteng who, in cahoots with Liz Truss, grabbed the Treasury money bag and started running down Whitehall throwing £20 notes in the air before being rugby tackled by the bond markets. I sadly, don’t expect too much from any Chancellor, from whichever party, over the next few years at least.

On the plus side, bond markets (the ultimate bellwether of economic prudence) have reacted well to the Budget. Gone are the days when a Labour Government would react to fiscal shortfall by applying for a payday loan!

So, in the final analysis, maybe the 2025 Budget was a bit of a non-event. But fear and loathing were the lasting memories of the days leading up to it, which probably explains why the UK economy reported a contraction in October. Meanwhile, back at Animal Farm, I’d like to paraphrase another animal tenet. “All Budgets are equal, but some are more equal than others”.

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