The Chancellor Rachel Reeves risks a new ‘omnishambles’ Budget if she raids pension tax relief, a former Pensions Minister has warned.

Steve Webb, now partner at LCP, says Reeves could face the same kind of problems he experienced when in government in 2012.

LCP analysed potential areas tipped for Treasury savings, such as scrapping the higher rates of tax relief or capping the ability to take 25% of a pension as a tax-free lump sum.

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

It concluded 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.

Its report ‘How to avoid an Omnishambles Budget’, identified five potential ‘traps for the unwary’ which could be associated with the changes.  Traps include being seen to break the manifesto commitment not to increase tax on ‘workers’, hitting the public sector, not raising meaningful money in this Parliament, putting extra burdens on employers, and undermining pension saving.

LCP said getting rid of salary sacrifice would be a clear breach of the manifesto pledge not to increase tax on workers, as well as increasing costs for employers.

It said abolishing higher rate relief would be a major structural change to the pension system, meaning very little additional revenue would flow during this Parliament.

Capping tax-free cash would be widely seen as moving the goalposts for pre-retirees and would need for extensive transitional protections which would mean that extra revenue from the measure could be negligible in this Parliament.

Steve Webb, said: “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. 

“The political backlash against such reforms could easily echo previous ‘omnishambles’ Budgets where a U-turn was made within a matter of weeks.”