It has been hard to open a newspaper or watch a TV news bulletin recently without seeing predictions of future tax rises.
The suggestion that individuals and businesses could end up paying more tax after the 2025 Budget, which is due later this year, were given extra impetus by the Spending Review released by the chancellor, Rachel Reeves, on 10 June 2025.
In a bid to drive badly needed economic growth, the Review, and the earlier Spring Statement in March, made a series of major pledges of capital funding for infrastructure projects. These were in addition to the big housebuilding programme previously announced.
Key departments, such as defence and health, also saw boosts to their budgets, in response to rising geopolitical uncertainty and the long-term crisis in the NHS, respectively.
Overall, the government has committed to an additional £300 billion in future spending. This inevitably raises the question as to which taxes could increase, or allowances be reduced, to fund this.
The government may feel constrained by its pre-election tax pledges
Before the last election, the Labour Party pledged not to increase:
- Income Tax
- VAT
- Employee National Insurance contributions.
Understandably, they are liable to want to stick to that as far as possible, unless economic challenges make that impossible. Another option would be to argue that they could not have predicted the effect of tariffs, and the need to increase defence spending, when making those pledges.
But if they are not prepared to do that, then they will have to find other sources of revenue, or ways to reduce existing expenditure.
Read about five possible changes the government could make that might affect your retirement plans.
1. Reduce pension tax relief
You currently benefit from tax relief on your pension contributions at your marginal rate of Income Tax. Basic-rate relief is typically added automatically, and you can also claim higher- or additional-rate relief, usually through your self-assessment tax return.
One suggestion that has often been made is to abolish higher rates of relief, so that all personal contributions just attract basic-rate relief of 20%.
This would certainly raise valuable revenue for the Treasury, with the Institute for Fiscal Studies estimating it could save £15 billion a year.
One associated idea that has also been mooted is to increase the 20% basic rate, while keeping it below the higher rate of 40%. This would certainly encourage pension saving for basic-rate taxpayers, although it would reduce the level of savings for the treasury.
If you are a higher- or additional-rate taxpayer, such a move would likely reduce the tax relief you could reclaim and make pension contributions a less attractive option.
However, it is worth bearing in mind that pensions are still a highly tax-efficient way to save for your retirement, with no Capital Gains Tax (CGT) or Dividend Tax on any gains or income withdrawals. Furthermore, you can also take 25% of your fund free of Income Tax (usually limited by the Lump Sum Allowance).
As with many financial decisions, how you respond to this potential change will be based on your personal circumstances, both now and after you retire.
2. Increase the rate of Capital Gains Tax
You may have to pay CGT on the profit you make when you sell an asset, such as stocks and shares or other investment holdings.
In the October 2024 Budget, the government increased the rates of CGT from:
- 20% to 24% for higher- and additional-rate taxpayers
- 10% to 18% for basic-rate taxpayers.
If you have a substantial investment portfolio and are planning to use it to provide you with a regular annual income, any further increase in CGT rates, such as aligning them with Income Tax rates, could affect your income planning.
One effective step you can take to mitigate the effect of any increase to CGT is to make full use of your annual ISA allowance, which is £20,000 in the 2025/26 tax year. The profit you make on a Stocks and Shares ISA is exempt from CGT. Because of this, they can be a highly tax-efficient option.
You should also remember that the £20,000 allowance applies to individuals, so you and your spouse or partner can invest £40,000 in the current tax year in this way.
3. Make changes to Inheritance Tax
This government has already made one major change to Inheritance Tax (IHT). In the 2024 Budget, the chancellor confirmed that from April 2027, your pension funds are set to become part of your estate when it comes to assessing your IHT liability.
Successive governments have frozen the nil-rate band (the amount above which your assets become liable for IHT) at £325,000 since 2009. Likewise, the additional residence nil-rate band of £175,000, which your beneficiaries can claim if you pass your main residence to direct descendants, has been frozen since 2019.
This has meant that as the value of your assets increases, such as property and investments, IHT becomes payable on a larger proportion of your estate.
Any additional changes the government may consider, such as extending the freeze on nil-rate bands beyond the current deadline of 2030, or even increasing the overall IHT rate from 40%, make it important to review your estate planning and retirement income arrangements to ensure you are reducing your tax liability as far as possible.
4. Reintroduce the Lifetime Allowance
The Lifetime Allowance (LTA) was removed in 2023 and ultimately abolished in April 2024. It had previously capped the amount you could accrue in your pension fund without incurring an additional tax charge when accessing your pot. This charge could be as much as 55%.
But a recent report in MoneyWeek highlighted the suggestion made by the deputy prime minister, Angela Rayner, that the LTA be reintroduced, raising as much as £800 million for the Treasury each year.
Such a reintroduction would add an additional level of complexity to your retirement income planning, particularly in light of your pension fund set to be liable for IHT from April 2027.
The potential of a new LTA highlights the importance of effective retirement income planning, maximising tax mitigation opportunities, and considering the different options you have to provide yourself with income once you stop working.
5. Reduce the Annual Allowance
The Annual Allowance is the maximum gross amount you can contribute to your pension in a tax year that you will receive tax relief on.
For the 2025/26 tax year, the allowance is £60,000. You cannot contribute more than 100% of your earnings in a single tax year, unless you carry forward unused allowance from a previous year. Your Annual Allowance may also be reduced if your earnings exceed certain thresholds or you have already flexibly accessed your pension.
More broadly, the government could reduce the Annual Allowance threshold itself, saving money in terms of restricting the amount of tax relief payable.
If this were to happen, you may want to consider maximising other retirement savings options, such as ISAs and investment bonds. While you will not get tax relief on your ISA contributions, any withdrawals you make are free from Income Tax and CGT, so these accounts are a highly tax-efficient way to save and invest for your retirement.
Additionally, investment bonds can also be an effective income option, with the ability to defer Income Tax on 5% of your original investment each year.
Get in touch
The 2025 Budget could easily be highly impactful if you are approaching retirement and looking at your income plans.
If you would like to talk about your own arrangements, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate tax planning.