According to a leading left-wing think tank, Rachel Reeves could raise at least £10 billion a year by radically restructuring the pension system and cutting tax relief for high earners.

The Fabian Society’s report says that pension tax relief has become significantly more costly for the government and that the changes it proposes would cover half of the £22 billion deficit in public finances identified by the Chancellor of the Exchequer.

Reeves has clearly indicated that she is planning a tough budget with tax increases for October 30, but has stated that she will not increase income tax, VAT or national insurance contributions.

Andrew Harrop, general secretary of the Fabians and author of the report, said Reeves should consider cutting pension tax relief and redistributing it so that it is less favourable to the wealthy.

According to the report, tax relief on pension contributions amounted to £66 billion in 2022-23, an increase of 55 percent since 2016-17. The tax is paid when individuals take their pension, but this only raised £22 billion for HMRC in 2023.

Although top and highest rate taxpayers make up 19% of taxpayers, they received an estimated 53% of pension tax relief in 2022-2023. Just over a third of the relief (35%) went to women.

Harrop said Reeves had a number of options for changes – a selection of which would raise at least £10 billion a year. These included:

• Creating a single flat rate of tax relief on personal and occupational pension contributions for all tax brackets (e.g. 25p or 30p per pound of gross income). Currently, pension tax relief depends on the individual’s marginal tax bracket.

• Charge employee national insurance contributions on employer pension contributions and in return receive a higher government grant on the first £7,500 of annual pension savings.

• Reduce the maximum tax-free lump sum to £100,000 or 25% of pension assets, whichever is lower. Currently the tax-free lump sum can be over £250,000.

• Tax the inheritance of pensions fairly by subjecting pensions to inheritance tax and levying income tax on all inherited pensions.

• Allow employees to deduct social security contributions on private pension income (with an allowance to exclude smaller pensions) in exchange for the reversal of the impending cuts in winter heating subsidies.

Harrop said: “Pension tax relief is very expensive and very unequal. It costs the Exchequer over £60 billion a year and more than half of that money goes to higher and top rate taxpayers. Given the enormous pressure on public finances, the UK cannot afford to maintain such a costly and poorly targeted system.

“Rachel Reeves must increase government revenues while protecting families’ living standards and stick to Labour’s election promises. As part of her tax-raising budget in October, she should introduce pension tax relief reforms that save money and redistribute taxpayer support from the rich to low and middle earners.”

Other options Reeves is considering include higher revenues from capital gains tax and inheritance tax – both of which would hit higher earners the hardest.