Chancellor Rachel Reeves is understood to have been told by senior Treasury officials that reducing the level of tax relief on higher earners would disproportionally hit those on modest incomes who work for the state.
Despite warnings that it would unfairly penalize up to a million teachers, nurses, and other public sector workers, Labour is expected to drop plans for a tax raid on pension savings.
It is believed that senior Treasury officials advised Rachel Reeves that reducing the 40% tax break for higher earners would disproportionately affect those with relatively low incomes who work for the state. It could, for instance, result in an additional tax bill of up to £1,000 per year for a nurse earning £50,000.
After giving public sector workers a pay raise, a senior government official stated that it would be “madness” to impose significant tax increases on them. Another government source talked about Labour’s decision to drop plans to reintroduce a lifetime allowance cap on pension savings because it was worried that junior doctors would be hurt.
They informed The Times that “the government will take into account the impact on public sector workers.” Reeves has limited options as she tries to raise £16 billion in taxes to fill a “black hole” in the public finances, as she has referred to it.
On Wednesday, the chancellor is expected to present her “major measures” to the fiscal watchdog, the Office for Budget Responsibility. Changes to the capital gains tax, which currently has a lower rate than the income tax, are thought to be one of the changes that Reeves is considering.
The Institute for Fiscal Studies, a think tank, reports that she is also looking into closing inheritance tax loopholes, which have the potential to raise £4 billion for the Treasury.
