But new analysis from pensions experts LCP finds that although the Chancellor may think that pension tax relief represents low hanging fruit, she could find out that it turns out to have a bitter after-taste politically and economically, risking a rapid U-turn ‘within weeks’.

Following the previous U-turns over Winter Fuel payments and disability benefits, and a very public reshuffle over the weekend, the government will be hoping for a smoother ride over the coming budget.

Commenting on the analysis, Steve Webb, report co-author and partner at LCP says: “Raiding pension tax relief may look superficially attractive for a cash-strapped Chancellor. 

“But lying beneath the surface are multiple traps for the unwary, meaning that reforms might raise far less than expected, break manifesto promises to workers or put additional burdens on employers who are already under pressure. 

Steve, who was pensions minister in the coalition government from 2020-2015, adds: “The political backlash against such reforms could easily echo previous ‘Omnishambles’ Budgets where a U-turn was made within a matter of weeks.”

The analysis concludes that a Budget decision to cut pension tax relief could bring back memories of the 2012 ‘Omnishambles’ Budget where high profile measures created a storm of opposition and had to be watered down within weeks.

The new report ‘How to avoid an Omnishambles Budget’, look at areas typically highlighted as potential areas for Treasury savings. 

The report then identifies 5 potential ‘traps for the unwary’ which could be associated with some or all of these changes.  These are:

  1. Breaking the manifesto commitment not to increase tax on ‘workers’
  2. Hitting the public sector especially hard at a time of fragile industrial relations
  3. Not raising meaningful money in this Parliament, because of the time taken to implement change or because of the need for extensive protection for losers
  4. Putting extra burdens on employers, coming on top of the £25bn hike in employer NICs in the last Budget
  5. Undermining pension saving, at a time when even the Government estimates that around 14 million workers are not saving enough for a decent retirement

The report looks at how pension changes would hit particular groups, including public sector workers.

It says: “Those on relatively modest incomes but with long service could be particularly hard hit by the abolition of higher rate relief or the capping of tax-free cash. 

“Although public sector workers make up a minority of the workforce, the generosity of their pension arrangements and the high level of pension membership in the public sector mean we expect they would be disproportionately affected by such changes.”

In addition, following the publication this year of HMRC research exploring employer attitudes to potential cuts in ‘salary sacrifice’ for pensions, the report also looks at the scope for capping or scrapping this element of the system.

It says: “Getting rid of salary sacrifice is the measure that has the most adverse effect on those on modest earnings, with over 3 million basic rate taxpayers set to lose if the change went ahead; in our view this would be a clear breach of the manifesto pledge not to increase tax on ‘workers’, as well as increasing costs for employers.”

There’s also the possibility of capping tax-free cash, but the report says this would be “moving the goalposts” for those who were approaching retirement and had made plans based on the current rules”.

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Tim Camfield, report co-author and a principal at LCP adds: “Millions of people on modest incomes benefit from various features of the tax relief system, including the ability to sacrifice salary and benefit from a reduced National Insurance bill. 

“If this measure was scrapped, employees paying basic rate tax and trying to do the right thing by saving for their retirement could well be losers, as well as the employers who try to provide good pensions. 

“Any such change could undermine pension saving and confidence in the system and should be avoided.”