Rachel Reeves to scrap pension tax raid after warnings it will hit public sector workers hardest

Senior Treasury officials have warned that the measure would disproportionately affect those on modest incomes employed by the state. For instance, a nurse earning £50,000 could face an additional annual tax bill of up to £1,000.

The original plan sought to raise funds by reducing the current 40 per cent level of tax relief on higher earners. However, concerns have been raised about the fairness of such a move, particularly in light of recent pay rises for public sector workers.

Union leaders have warned against the proposal, with Vishal Sharma, chair of the BMA pensions committee, stating that it would "negate the recent hard-won pay rises" and potentially "reignite the recent pay disputes" across the NHS.

Former Pensions Minister Steve Webb echoed this sentiment, suggesting that Reeves would be reluctant to pursue this course of action so soon after agreeing to pay settlements with public sector unions.

The move also follows Labour's earlier decision to drop plans for reintroducing a cap on the lifetime allowance on pension savings.

This proposal was abandoned during the election campaign due to concerns about its potential impact on junior doctors and other public sector workers.

With limited room for manoeuvre, Reeves is now said to be exploring alternative measures to raise the £16billion in taxes she deems necessary to fill the "black hole" in public finances.

The Chancellor is expected to submit her "major measures" to the Office for Budget Responsibility on Wednesday.

Among the changes under consideration are adjustments to capital gains tax, which is currently charged at a lower rate than income tax.

Reeves is also said to be examining the closure of inheritance tax loopholes, a move that could potentially raise £4bn for the Treasury, according to the Institute for Fiscal Studies.

Another option being explored is reducing the amount people can withdraw from their pension pots tax-free upon retirement, currently set at £268,275. This scheme costs the exchequer £5.5bn annually.

A Treasury spokesperson declined to comment on Budget speculation.

While the abandonment of the pension tax raid may provide relief for public sector workers, concerns remain for pensioners and older citizens.

Dennis Reed, Director of Silver Voices, warned that the Government might consider further cuts to benefits for seniors.

Reed cautioned: "If the Government successfully rides out this storm, they will inevitably squeeze senior citizens further, perhaps by means-testing free prescriptions, bus passes and even the state pension itself."

These worries come in the wake of Labour's decision to cut the Winter Fuel Payment. Reed urged older people to "fight for our dignity in our remaining years on this planet."

The potential reduction in tax-free pension withdrawals upon retirement remains a possibility.

This measure, if implemented, could significantly impact retirees' financial planning and add to the growing concerns about the future of pensioner benefits in the UK.