How to avoid an ‘Omnishambles’ Budget: Why raiding pension tax relief is riskier than it looks

New LCP analysis highlights that potential cuts to pension tax relief in the upcoming Autumn Budget 2025 could carry significant political and economic risks, reminiscent of the 2012 ‘Omnishambles’ Budget.

As the Chancellor looks for additional sources of tax revenue, pre-Budget speculation often points to pension tax relief as ‘low-hanging fruit’.

Our report examines the areas typically highlighted as potential Treasury savings, including:

• Removing the higher rates of tax relief enjoyed by those who pay tax above the basic rate
• Capping (or even scrapping) the ability to take 25% of a pension as a tax-free lump sum

Following HMRC research this year on employer attitudes to potential cuts in ‘salary sacrifice’ for pensions, the report also considers the scope for capping or scrapping this element and identifies five potential ‘traps for the unwary’ associated with these changes, including breaking the manifesto commitment not to increase tax on workers.

We apply a red/amber/green rating to each measure against these traps, showing that all potential cuts would raise serious issues and are likely to prove highly contentious.

Key findings include that public sector workers could be disproportionately affected by abolishing higher rate relief or capping tax-free cash, among other measures.

The chart shows that all potential cuts to tax relief raise serious issues and are likely to be highly contentious, with public sector workers, including those on modest incomes with long service, particularly affected by abolishing higher rate relief or capping tax-free cash.