How the Autumn Budget could impact your retirement

Chancellor Rachel Reeves leaves 10 Downing Street after a Cabinet meeting this month. Photo: Wiktor Szymanowicz/Future Publishing via Getty Images.

Keeping pace with pre-Autumn Budget pension rumours has been an uphill task. From cuts to tax-free cash and flat rates of upfront relief to salary sacrifice caps, barely a stone of the retirement system is being left unturned, as speculation swirls around the various ways Chancellor Rachel Reeves could shake things up in two weeks’ time.

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But it’s not just changes to pensions that could impact your post-work lifestyle. Any reforms to the tax and savings regime that squeeze your finances may hamper scope to save for your golden years or stymie how far your money goes once you’ve retired.

One desperately hopes the government resists short-term revenue grabs at the expense of savers’ long-term futures, especially as scores of data suggests millions of people risk reaching later life with inadequate wealth to live comfortably. Moreover, chipping away at the tax perks of pensions could derail wider efforts to improve workers’ financial security.

Given the importance and wide-reaching nature of pension and tax policies, let’s round up the potential changes that may affect your retirement.

1) Tax-free cash cut off the table?

Speculated cuts to pension tax-free cash have occupied more column inches than any other rumour, with reports suggesting that the maximum amount, currently £268,275 (or 25% of your total savings if lower), could be hacked down to just £100,000. The fear stoked by these rumours has sparked a sharp uptick in tax-free pension withdrawal volumes and values.

But according to a scoop earlier this week in the Telegraph, the Treasury confirmed there are no plans to alter the cap on tax-free cash, which if true will bring welcome relief to retirees who’ve saved hard for later life.

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Either way, if the government had no plans to target tax-free cash, there is sense this message should’ve been communicated months ago as many savers will have acted in response to speculation.

2) Changes to upfront tax relief

Sticking with upfront tax relief, rumours about reforms here have surfaced before various major fiscal events in the past decade, even though they’ve ultimately proved wide of the mark.

There are a couple of ways that the government could trim the upfront tax perks of paying into a pension. However, notable voices, including ex-pension minister Sir Steve Webb have warned the backlash to any reforms in this area could be severe.

• Flat rate of upfront relief

One approach is to switch from the current system – where pension contributions attract relief at your marginal rate of tax, which could be 20%, 40% or 45% (or perhaps as much as 60%) – to a flat rate system. Pension tax relief costs the government more than £50 billion every year, and around two-thirds is claimed at the higher and additional rates, so the government may see this as fertile ground to raise some cash.

Introducing a universal rate of upfront tax relief of say, 30%, penalises anyone who earns more than £50,270 a year – the 40% threshold – but those with income below this figure gains.

This would be a deeply controversial move and wouldn’t just hurt the retirement prospects of the biggest earners. Due to frozen tax thresholds, millions of workers are tripping into higher-rate territory, without necessarily feeling better off. Arguments to suggest those in this group have ‘broad shoulders’ would be tenuous and fly in the face of the government’s aim to improve workers’ retirement outcomes.

• Salary sacrifice cap

Reports are mounting that Reeves will target the salary sacrifice system, which enables workers to trade a portion of earnings for an equivalent pension payment. The upshot here is that you not only receive income tax relief, but swerve national insurance contributions (NIC) too, lifting the combined saving for a basic-rate taxpayer from 20% to 28%. For higher earners, the NIC saving is less generous as the NIC rate falls to 2% once taxable income exceeds £50,270.

Employers can also benefit from these arrangements; if they’re paying you a lower notional salary, they’ll also pay less NICs. Some businesses operate SMART pensions, where they pay their NIC saving into workers’ pensions, offering a further boost to staff.

According to the rumour mill, Reeves may cap the amount available under salary sacrifice to just £2,000, meaning any excess won’t attract NIC relief – a blow to both savers and businesses.

As mentioned above, basic-rate taxpayers gain the greatest benefit from salary sacrifice as the NIC saving is 8% compared to 2%. Some higher-earning workers who sacrifice salary and/or bonuses to avoid the 60% tax trap and free childcare cliff edge once income trips above £100,000 may need to take a different approach, such as beefing up personal pension contributions instead of exchanging of portion of their salary.

We should note that businesses have been on the wrong side of tax changes in recent years, suffering higher corporation tax since April 2023 and larger NIC bills since April 2025. If salary sacrifice is also squeezed, some businesses may have less resource to offer generous pensions to their staff.

In the same vein as a universal rate of upfront relief, implementing such a regime would be drenched in complexity and controversy, especially if the government implements a carve out for public sector defined benefit (DB) schemes which risks creating a system that benefits some workers more than others. Furthermore, pensions’ upfront tax advantages are a crucial helping hand to help people to save for retirement.

3) Extending the deep freeze on tax thresholds

Frozen tax thresholds, a tactic known as fiscal drag, is a hot topic. Income tax and NIC bands haven’t risen since 2021 and are set to remain unchanged until April 2028, pulling more people into higher rates of tax as their incomes rise naturally over time. Essentially, it’s a stealthy way for governments to boost revenues without jacking up headline tax rates, making it more politically palatable, but no less punishing for those affected.

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And it’s certainly lucrative. Figures from the Institute for Fiscal Studies (IFS) calculate that it will raise almost £43 billion by 2027-28, with rumours bubbling away that the chancellor may prolong the deep freeze for a couple more years to meet her fiscal targets. Maintaining tax thresholds until April 2030 could garner the Treasury an extra £10.4 billion a year, according to IFS calculations.

Extending fiscal drag will hurt both savers and those already in retirement, as it means more earnings or retirement income would be lost to tax over time, reducing scope to either save or cover outgoings in later life.

4) Income tax reforms

Labour’s election manifesto commitment not to raise taxes on working people is hanging in the balance, according to recent reports.

Rumoured reforms to income tax, specifically at the basic rate - which is paid on income between £12,570 and £50,270 - are gathering pace. The government has a few options in this area. The heaviest-handed approach would be to hike the 20% basic rate to either 21% or 22%, a move expected to raise £8 billion or £16 billion, respectively. But to maintain the manifesto promise, reports suggest any increase will be offset by an equivalent cut to NICs.

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Under such a system, a worker’s tax-home pay remains the same, but anyone aged 66 or over loses out. That’s because you stop paying NICs once you hit state pension age whether you’re still working or not. If the basic rate of income tax hikes to 22%, pensioners with taxable income of £50,000 or £30,000 pay an extra £748.60 and £348.60, respectively, to HMRC every year.

Ignoring salary sacrifice, which would be tax neutral if income tax is increased by 2 percentage points but NICs are cut by the same level, saving into a pension would become marginally more appealing for basic-rate taxpayers as they would save 22p in the pound instead of 20p.

5) State pension hike to be confirmed?

Good news for retirees should arrive at the Budget, with Reeves expected to rubber stamp next year’s state pension increase. Under the treasured but controversial triple lock mechanism, the state pension uprates every year by the highest of inflation, average wage increases or 2.5%.

With the inflation and earnings data now confirmed, it’s the latter that’s proved the highest metric, and for the third year running. Wage growth between May and July was 4.8%, outstripping year-on-year inflation which registered 3.8% in September.

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If Rachel Reeves pushes the 4.8% increase through – Labour has committed to the triple lock this parliament so there’s little to suggest she won’t – the annual full state pension will rise from £11,973 to £12,547, while the old state pension, paid to those who reached state pension age before 6 April 2016, will hike from £9,175.40 to £9,615.84 a year.

While retirees will warmly welcome an inflation-beating boost to the state pension, there are some implications to be mindful of.

Should the full amount rise to £12,547, it will almost swallow up retirees’ £12,570 tax-free personal allowance. As noted above, with income tax bands frozen since 2021, pensioners are paying more tax on other income, notably private pensions, with millions more filing file tax returns for the first time. Those who rely heavily on the state pension to make ends meet will face a further squeeze if basic-rate income tax is hiked.

What’s more, unless the government rows back on its commitment to keep fiscal drag in place until 2028, the state pension will become taxable from April 2027.