The government should not cap up-front income tax as a means to raise revenue during reforms to pensions taxations, the Institute for Fiscal Studies (IFS) has said.

The warning comes amid recent speculation that the new Chancellor will make changes to pensions taxation to increase revenue in her upcoming inaugural Budget.

According to the IFS, the current system of pension tax provides overly generous tax breaks to the individuals with large pensions, high retirement incomes and substantial employer pension contributions. As a result, it agrees there is a strong case for reform.

However, it urged the government to not look for “easy money” by simply reducing up-front income tax relief as this would be “damaging, complex and inequitable.”

It said this reform would impact more than just higher-rate taxpayers under the current system as it would push additional pension savers into higher-rate tax brackets if their and their employer’s pensions contributions were no longer tax-exempt.

Therefore, the IFS recommended that the government assesses areas of genuine excess generosity, such as employer contributions, tax-free lump sums and inherited pension pots.

It urged the government to ensure change is carefully thought through and set out as a long-term strategy to reform in order to design a pension taxation system that is carefully designed and provides savers with certainty and stability.

IFS senior research economist David Sturrock said: “Tax reliefs for private pensions are overly generous to those with large pensions and are in need of reform.

"The case for restricting up-front income tax relief is weak, however. If the new Chancellor is looking to raise revenue from pensions taxation, she could do this while improving the design of the system.”

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