The Labour Party has reversed its decision to bring back the Lifetime Allowance on pensions, a measure originally estimated to generate £800 million in tax revenue. This reversal led to allegations of a growing financial ‘black hole’ in the party's budget.
Financial Implications of Labour's Policy U-turn on Pensions Tax
Rachel Reeves, the shadow chancellor, has abandoned a pledge to reintroduce the Lifetime Allowance, which previously capped the tax-free amount individuals could save for retirement.
Despite this U-turn, Labour maintains that this potential revenue was never included in its spending plans, implying that there is no need to offset it elsewhere.
However, the Conservative Party says the decision worsens Labour's financial deficit, which it estimates at around £40 billion.
The Lifetime Allowance, abolished in 2023 by Chancellor Jeremy Hunt, was introduced to encourage experienced NHS staff to stay in work by avoiding having to pay significant tax on their pensions.
Reversal of the Lifetime Allowance Policy
At first, Ms Reeves promised to reverse Mr Hunt's policy, describing it as a ‘tax cut for the rich’. Although doctors were assured that they would be protected from any adverse effects, concerns were expressed about a possible exodus from the NHS.
The Office for Budget Responsibility estimated that abolishing the allowance would result in an annual tax cut of £800 million.
Abandoning the reinstatement of the allowance, first reported by the Financial Times, is Labour's decision to alleviate confusion over what it calls the Conservatives' “botched” policy. One source said mistakes in the legislation had left many investors with large pension funds in limbo.
‘The Conservatives mishandled the policy of abolishing the Lifetime Allowance, leaving thousands of people close to retirement in limbo due to legislative errors,’ the source said. Ms Reeves has pledged to resolve this issue, with Labour prioritising economic stability and certainty.
Still, Laura Trott, Chief Secretary to the Treasury, says the measure will add £3.2 billion to Labour's financial deficit. She accused Labour of plotting a ‘raid’ on pensions by not adopting the Conservatives‘ “triple lock plus”, which would adjust pensioners’ personal allowance to match increases in the state pension, protecting it from tax.
Mr Trott said: ‘Labour's U-turn adds £3.2 billion to their current £38.5 billion deficit. They have failed to exclude many pension taxes, which could make the state pension subject to income tax for the first time".
Labour's Response and Electoral Strategy
The move is seen as an attempt by Labour to counter-accusations that it is planning a tax raid if it comes to power. Sir Keir Starmer has already pledged not to raise income tax, national insurance or VAT.
The Conservative party has made taxation, particularly of pensioners, a key part of its election strategy, accusing Labour of planning to increase the tax burden on families by £2,000 to close its budget deficit.
Sir Keir dismissed these allegations as deliberate lies, saying that Labour's policies are fully costed and funded.