How Labour’s policies are forcing people to make bad decisions

Savers and high earners could be left even worse off by trying to avoid punishing tax raids.

Mattie Brignal Senior Money Reporter

24 January 2026 11:15am GMT

Saving is now a mug’s game

The Government has created a “strange incentive” for people to spend their pension wealth, and save less into it in the first place, says Ian Cook, of wealth management firm Quilter Cheviot.

In her first Budget, Chancellor Rachel Reeves announced that from April 2027, unspent private pension wealth will be liable for inheritance tax. The death duty change means that many formerly risk-averse savers – who have worked for decades to accrue sizeable pension pots to see them through the needs of their later years – are starting to view diligent saving as a mug’s game.

On top of that, workers paying money into their retirement pots via salary sacrifice will incur National Insurance on contributions over £2,000 from 2029, under plans announced in the November Budget.

Mr Cook said: “Inheritance tax and salary sacrifice changes have damaged the perception of pensions. People are starting to question whether saving is the right thing to do.”

Inheritance tax is particularly hated by savers because it is typically levied on money that has already been taxed.

Financial planners have reported older clients choosing to splash their pensions on cars and expensive holidays, or give gifts to relatives to beat the taxman. Doing so can make sense in some circumstances. Basic-rate taxpayers pay 20pc tax on pension pot withdrawals, compared to a potential inheritance tax hit of 40pc. This rate could be higher if a pension dragged the value of an estate over £2m, when the family home allowance starts to taper.

But this tactic of trying to beat the taxman could lead to people being left without enough money in retirement.

Bryony Hope**, 76, is withdrawing money from her £1m pension as tax-efficiently as possible to help her family swerve a hefty tax bill when she dies. She has already made cash gifts of £50,000 to two of her grandchildren on the understanding that the money should be used to help them on to the property ladder.

“I’ve worked hard for 39 years, and I hate the idea that my kids are going to pay tax on what I leave them,” she says. “I’m planning on there being no money left in my pension by the time I go. There will only be the house.”

Yet this strategy inevitably comes with risks. Ms Altmann warns that retirees who plunder their savings today risk calamity in later life. “The retrospective imposition of inheritance tax on unspent pension funds is a classic example of a dangerous policy intervention,” she says.

“It will mean less money going into pensions, less money invested for the long term, more people emptying their funds while still relatively young and more pensioners in poverty in old age.”

It is not just pensioners being forced to make potentially disastrous long-term decisions. A recent survey of business owners found that nearly one in five planned to hand over their companies to their children in the next five years due to cuts to inheritance tax relief, despite analysts warning that putting inexperienced offspring in charge of multimillion-pound firms is a bad idea.

‘My work on a Friday is worth 38p in a pound’

Another area where tax policy is forcing people into potentially poor decisions is the £100,000 tax trap. In an effort to avoid paying very high marginal rates of tax or to gain access to childcare subsidies, many high earners are choosing simply to cut their salary by reducing hours, declining promotions or negotiating pay cuts.

Once someone earns more than £100,000 they are ensnared in a situation where the 40pc higher income tax rate combines with the tapered loss of the £12,570 tax-free personal allowance. For every £2 earned above £100,000, a worker loses £1 of their personal allowance. By the time they earn £125,140, this has fallen to zero.

It means anyone caught in the trap pays an effective 60p in income tax on that part of their earnings, plus 2p of National Insurance Contributions. Once all the allowance is lost, the income tax rate falls to 45p in every pound.

Parents with young children are hit hardest. Childcare perks that can be worth tens of thousands of pounds are lost completely once either parent earns six figures.

“It’s simply a badly designed policy,” according to Professor Schneider.

Alex Waters**, a six-figure earner in the pharmaceutical industry, is planning to drop down to three or four days a week within the next three years. He already pays around 40pc of his salary into his pension each year and buys extra holiday days to stay below the £100,000 mark.

Reducing the number of productive hours he works doesn’t sit well with Mr Waters. “I think my job is useful and I enjoy it,” the 52-year-old says. “But my work on a Friday is worth 38p in a pound. I could have a nice long weekend instead.

“It would be better for me and the taxman and the company if I worked more, but it’s this stupid thing the Government can’t be bothered to change.”

Stuart Adam, an economist at the Institute for Fiscal Studies, believes that successive governments have not been transparent with high earners about the tax trap. “I can see why politically [it’s] attractive. But it is harder for people to do what’s best for themselves if they don’t understand the consequences of what they’re doing.”

‘Paying more tax through no fault of their own’

Upcoming changes to how we can save into Isas may also backfire by inadvertently encouraging people to save in accounts that aren’t shielded from tax, or move money into investments that would be more prudent to be held in cash.

Current rules allow savers to stash up to £20,000 a year in the tax-free savings products. But from April 2027, the annual cash Isa limit will be cut to £12,000 – unless the saver is aged 65 or over – with the remaining £8,000 restricted to investments only.

Reeves wants to encourage more savers to buy stocks and shares, on the basis that the returns are better than cash, and that it boosts the economy. But analysts have warned that more risk-averse savers may respond to the limit cut by swapping the tax-free wrapper of an Isa for a taxable savings account, or simply leave the excess money languishing in a current account. In either case, they would be worse off than they were before.

Yet-to-be-announced rules related to the Isa changes could also see a charge levied on cash held uninvested in stocks and shares Isas. This could force people to invest this money at a bad time, over-expose them to market falls or leave them without enough cash savings for short-term needs such as buying property or funding retirement.

Sarah Coles, of investment platform Hargreaves Lansdown, says: “There will be people for whom cash Isas are the most sensible home for their money, especially if they’re saving for the short term, have significant sums of cash and are a higher earner, so they won’t want to move into investment.

“They may end up having to save the excess in a savings account, and pay more tax through no fault of their own.”

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