Chancellor Philip Hammond is likely to revert to the ‘salami-slicing’ of pension tax relief as a way of funding increased spending on the NHS, according to Royal London director of policy Steve Webb.

Commenting on a policy paper released by Royal London on this year’s Budget, Webb said “time and again, pension tax relief has been the go-to source of money for cash strapped Chancellors”.

“Pensions should be a long-term business where people can plan with confidence for their retirement, knowing that the tax rules around pension saving will be stable,” he stated.

“But the Chancellor will find it hard to raise other, more visible, forms of taxation. We fear that the amount people can contribute into their pensions each year will be cut yet again, sending out entirely the wrong message at a time when we need people to be saving more, not less.”

The policy paper said however that the Chancellor is highly unlikely to go for radical reform such as applying a flat rate of pension tax relief to all pension savers, regardless of income. The most likely change – a cut to the annual limits on allowable pension contributions – could leave more than 100,000 higher earners out of pocket by up to £4,000 each.

In addition the paper highlighted three factors which make a cut in pension tax relief highly likely. Firstly, the Chancellor faces big spending pressures, particularly to meet the £20bn per year needed for the NHS, but also because of the need to improve public sector pay, to deal with concerns over Universal Credit  and to meet rising social care costs.

Secondly, political commitments mean that raising other taxes such as income tax, VAT, petrol duties or corporation tax rates would be very difficult and thirdly pension tax relief costs the government around £25bn per year [net of the tax paid by today’s pensioners], and that cost has risen sharply in recent years.

Since 2010 there have been six separate cuts to pension tax relief – three to the lifetime limit on pension pots which can be accrued with the benefit of tax relief, and three to the annual amount which can be contributed.

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