How you could be affected

There is growing speculation that the budget could change the way pensions are taxed.

Chancellor Rachel Reeves has said she needs to raise 22 billion pounds, and some experts say she could make changes to workplace or private pension systems to find some of that. This is separate from another debate state pension.

There are many choices that may affect workers getting their first job, those already working, all the way to retirement. Here’s what can happen, and why you should care even if you’re only in your 20s.

National Insurance (NI) is deducted when you get your salary and is used by the government for things like benefits and public services. Your employer must also pay NI contributions.

However, funds used for pensions are not subject to income tax and National NI.

One option for the chancellor is to make employers pay at least a certain amount of national NI on the money they put into workers’ pensions.

Doing so could immediately raise billions of pounds for the government.

However, this additional cost to business owners may leave them with less money to spend on hiring and investment. As a result, finding a job may become more difficult.

Businesses can also limit pay rises, hit all employees, or reduce pension contributions for new employees.

Alternatively, employers who currently take advantage of the state by encouraging workers to take lower wages and increase pensions (known as wage sacrifice) could stop doing so.

For Ms Reeves, the appeal of this option is that she can raise funds without making a significant difference to people’s take-home pay.

The disadvantage is that it reduces the incentive for employers to put money into employee pensions. This means that when existing workers retire, they won’t have as much income.

There are various rules when inheriting property from a partner or parent on the death.

inheritance tax It is paid if the estate is worth more than £325,000, but any money saved in the pension does not count towards this amount.

Additionally, anyone who dies before age 75 can generally have their remaining pension savings transferred tax-free as a lump sum or as income.

If they die aged 75 or over, their pension can still be inherited, but it is treated as income and those they leave behind may have to pay income tax. Here’s more about these rules.

Eliminating these tax breaks would bring more money to the government, but the exact amount is unclear. In any case, the vast majority of people pay no inheritance tax because they leave an estate worth no more than £325,000.

People may also be angry because they organized their finances according to current rules, only to find that their loved ones would receive much less money if those rules were changed. The anger is even greater for those who are retired because they don’t have time to do much.

From the age of 55 (or 57 from 2028), anyone with pension savings can take a quarter of their money tax-free in a lump sum, up to a maximum of £268,275.

Some people use the money to pay off their own mortgage, if they have one. Others use it to help their children and grandchildren buy their first homes.

The chancellor is said to be considering lowering the cap.

By limiting the tax-free limit, people end up paying more income tax when receiving their pension. However, there are questions over how much additional money will be raised for the government and when.

Arrangements for those who have already exceeded the limit or plan to exceed the limit may also be complex and reduce the additional tax revenue received by the Treasury.

Speculation about changes often arises in the preparation of every Budget Pensions tax relief.

When you contribute to a pension, some of the money that would otherwise go to the government through tax is transferred into your retirement savings, known as pension tax relief.

When you put money into a pension, you don’t pay tax, but when you take the money as income, you do.

Under the current system, you get pension tax relief at the same rate as your income tax rate, meaning basic rate taxpayers get a 20% relief.

This means that for higher rate taxpayers, the relief is more generous at 40% or 45%, consistent with your income tax rate. You can read more about how to do this here.

Some economists say it would be fairer to provide the same level of relief to everyone.

Setting the flat tax deduction rate at 25% would benefit low-income employees who currently enjoy the 20% tax deduction by further reducing taxes.

However, higher-rate taxpayers earning around £50,000 a year or more will suffer as the tax relief will be lower than now.

Another but important complicating factor is that a large number of public sector workers, as well as some in the private sector, have so-called Defined benefit (DB) pension.

Ensuring the correct tax relief for high-rate taxpayers with these pensions will be complex.

This could mean they would automatically get a 40% or 45% tax relief and then submit a tax bill (which could be thousands of pounds) to repay some of that.

Tom Selby, of investment platform AJ Bell, said this could spark “intense rows” with NHS staff, teachers and civil servants who fall into this category.

This will be a tricky policy given that ministers have said they will not raise taxes on working people, and reports suggest the Treasury has now ruled out making changes.