Is the ‘Labour retirement tax’ happening, and should I be worried?
Now we’ve reached 2025, the autumn budget is starting to feel like a distant memory. Months of feverish speculation were suddenly ended as Labour dramatically unveiled their plans.
However, some speculation refuses to die. In the run-up to the budget, the idea of the nascent Labour government introducing a “retirement tax” was floated, and it’s an idea that refuses to go away – indeed, we have been asked by our own clients if such a thing is around the corner.
Our answer is simple enough: Labour has not announced any specific new tax targeting retirees. However, for those approaching or at retirement age, the budget did throw up important changes that should be considered by anyone planning their retirement and legacy.
Hang on – where did this ‘Labour retirement tax’ idea come from?
It’s all well and good for us to say it’s not happening, but you might be sceptical – there’s no smoke without fire, after all.
In this case, most of the anxiety seemed to stem by comments made by then-Prime Minister, Rishi Sunak, who did indeed claim that under a Labour government, the state pension would be subject to a “retirement tax”.
Houses of Parliament
However, these comments were misleading, to an extent. Sunak was referring to a proposal by his own party to raise the personal allowance for pensions – called the ‘Triple Lock Plus’ pledge. Labour’s own pledge was to maintain the current Triple Lock commitment, whilst maintaining the personal allowance at the current level.
The Conservatives claimed their version would save pensioners £1,000 across the duration of the next government. Was this claim correct?
Let’s take a look at the facts around the state pension. Firstly, it will be increasing to around £12,000 from April 2025. This remains under the £12,570 personal allowance, which means in turn that there will be no tax on the normal full state pension in the next tax year. If the pension continues to increase by the minimum level of 2.5% per year, at the start of the 2027-28 tax year a small proportion (£55) will fall into the basic rate tax band, which would equate to £11 of tax per year. (And that is, of course, only if you are entitled to the full state pension).
We’ll let you draw your own conclusions about whether ‘Triple Lock Plus’ would have truly delivered savings of £1,000 – but suffice to say this is the reasoning behind Sunak’s ‘retirement tax’ narrative, which was pushed hard by his party during their election campaign. It’s a ploy which clearly worked to some degree – people are still worrying about it.
So…the Labour retirement tax is not a thing – can I rest easy?
Yes and no! For those of you planning your legacy – and legacy planning should be a huge part of any calculations you do around your retirement funds and pension pot – the autumn budget did deliver some curveballs.
Here are just a selection (for a more comprehensive analysis, see our guide to the autumn budget).
- Firstly, Labour will look to bring “unspent pensions” into the scope of Inheritance Tax from April 2027. In our view, this is inheritance tax by stealth, given many people will have planned their inheritance tax situation using pensions over the years and are now unable to reverse those decisions, without facing very high levels of income tax. There is still uncertainty over how this will be applied in practice, but now is the time to take action.
- It was also announced there would be a combined lifetime cap on Business Property Relief and Agricultural Property Relief of £1m from April 2026. Small (and larger) businesses now face an uncertain future, as they are likely to attract large inheritance tax bills when their owners pass away.
- Stamp Duty on second homes is increasing again – there was already a 3% additional hit on normal Stamp Duty rates when buying additional property. From 30th October 2024 this has increased to 5%. Those of you who plan to use a buy-to-let property portfolio to supplement your retirement income can expect the trend of increasingly higher tax charges to continue under a Labour government, which will you will feel the effects of when you buy, run and eventually sell a property.
Given the additional layers of complexity these changes bring, if you want to leave a legacy to your loved ones, now more than ever is the time to seek expert advice.
A no-strings, complimentary chat with one of our experienced financial planners is the best place to start. It’ll give us a idea of your current financial position, and we’ll be able to tell you if some financial guidance would be of help (and if not, we’ll be honest about it).
Book a chat with us
Any money invested carries an element of risk and you are not guaranteed to get back the money you invested. This article does not constitute advice and you should consult your financial adviser prior to any action.
