Speculation is rampant regarding Rachel Reeves' upcoming budget, with potential changes impacting both pension savings and property taxation. While initial fears about cuts to tax-free pension cash seem to have receded, new reports suggest that 'salary sacrifice' pension schemes are now under scrutiny, alongside a controversial proposal for a council tax surcharge on higher-value homes.

Salary sacrifice is a tax-efficient method for employees to boost their workplace pensions. It involves an employee agreeing to reduce their gross salary, with the equivalent amount being redirected as additional employer contributions into their pension pot. This arrangement offers significant tax benefits, as the sacrificed income is not subject to income tax or National Insurance (NI). Consequently, employees can see a higher take-home pay compared to traditional pension contributions from taxed income. An additional advantage for parents earning over £60,000 is the potential to divert funds into pensions to retain more child benefit.

Employers also benefit from these schemes by avoiding employee NI contributions on the sacrificed amount; some even pass part or all of these savings back into the worker's pension. However, amid concerns that high earners are maximizing this perk, the government is reportedly considering restricting its tax benefits. One option being debated is a £2,000 cap on the amount of earnings that can be exchanged for pension contributions while still benefiting from a National Insurance exemption.

Introducing such a cap could generate up to £2 billion annually, but at a cost to both employees and companies. For example, an individual earning £55,000 contributing 10% (£5,500) via salary sacrifice could see their take-home pay cut by £188 a year, with their employer paying an additional £525 in NI. Pension experts have cautioned against reducing incentives to save, with Aviva CEO Amanda Blanc warning that penalizing employers who contribute more to pensions and discouraging personal savings would be detrimental to long-term retirement planning in the UK, especially given that 15 million people are reportedly not saving enough.

Separately, while pension tax-free cash remains a frequent subject of budget speculation, reports indicate that restrictions to the current 25% tax-free lump sum, up to a limit of £268,275 (available from age 55, or 57 from April 2028), are 'firmly off the table' for now. Pension tax relief, which provides a government top-up of 20% or more on contributions, is a highly valuable but costly tax break (estimated £50-60 billion annually). Although it's often rumored to be targeted, it is not currently considered a frontrunner for changes in this budget.

Beyond pensions, Rachel Reeves is reportedly set to introduce a new levy on hundreds of thousands of homes, aiming to raise £600 million. Dubbed 'the mansion tax' by Labour insiders, this surcharge is intended to target one in ten homes in England, specifically those currently designated Band F or above for council tax. Despite its name, the measure is expected to impact a significant number of middle-class families, particularly in London and the South East, where property values are higher. These families could face annual surcharges ranging from hundreds to thousands of pounds on top of their existing council tax bills, which already average £3,293.

The plan involves revaluing approximately 2.4 million properties across England to enable the Treasury to levy this new tax, with a council tax surcharge then applied to around 300,000 of the most valuable homes. This move is part of a broader strategy by Reeves to raise an estimated £25 billion to shore up national finances, following her decision to abandon a previously considered plan to raise income tax. Experts have warned that the uncertainty caused by this potential new tax could have catastrophic consequences for the property market, affecting up to a quarter of homes in some areas.

The existing council tax system, based on 1991 property values, has often been criticized by economists as regressive, with smaller homes sometimes paying proportionally more. While a full revaluation of properties has been considered, a separate surcharge is currently viewed as the most efficient way to collect additional revenue. Shadow Chancellor Sir Mel Stride has accused Labour of waging 'a class war against middle England,' asserting that such a tax raid would punish aspiration and hardworking people. Any new levy would likely follow a Valuation Office Agency reassessment and might not be introduced until 2028, potentially deferred until homeowners move or pass away.

The pre-Budget period has been described as 'shambolic' by Shadow Chancellor Mel Stride, with constant leaks and speculation fueling uncertainty and damaging the economy. Sir Jeremy Hunt echoed these concerns, highlighting the chaotic nature of British economic decision-making and its negative impact on market confidence. This new property tax proposal comes after a controversial period surrounding an abandoned income tax hike, which, despite initial plans, was deemed unlikely to generate expected revenues and led to accusations of a chaotic economic strategy.