Jeremy Hunt is preparing to boost the tax-free allowance for pensions by more than half a million pounds as he battles the wave of early retirement that has squeezed growth.

The so-called lifetime allowance (LTA) – which is the maximum amount of money workers can put in their pensions before they are taxed – is expected to be lifted from just over £1m in the Chancellor's maiden Budget.

The move will bring the LTA closer to its previous peak of £1.8m, which was cut by George Osborne.

While the exact level has not been finalised, sources indicated that it will be more than £1.5m. The threshold was previously frozen at £1m until 2028.

Dubbed the “doctors' tax” by some MPs, including the Conservative Growth Group of former Trussites, gradual cuts to the lifetime allowance mean many highly-paid workers, including NHS doctors, have cut their hours or retired early.

It is also understood that Mr Hunt will allow workers to contribute up to 50pc more to their pensions each year before being hit by the taxman, with the annual allowance expected to increase from £40,000 to £60,000. The money purchase allowance, which limits the tax relief people can enjoy on contributions made after they have started claiming their defined-contribution pension will also be raised from £4,000 to around £10,000.

The Institute for Fiscal Studies (IFS) estimates that changes to annual and lifetime allowances since 2010 currently bring in an extra £8bn a year to the Exchequer.

The think-tank said lifting the LTA would cost much less over the next five years. It estimates a 10pc uplift will cost £330m annually after five years. Each further 10pc uplift would cost less.

The reforms will focus on raising thresholds rather than removing some of the complicated quirks of the pensions system, which it is claimed have driven some into early retirement..

Paul Johnson, director of the IFS criticised “ridiculous” tapering rules that take effect for people who earn more than £240,000. Anyone who breaches this threshold sees their annual allowance reduced to as little as £4,000.

Mr Johnson said: “If you increase the annual allowance from £40,000 to £60,000, but then taper it so that people with high incomes can't use it, it's probably not going to be massively effective. But then if you do get rid of it, the policy becomes much more expensive.”

Mr Hunt's Budget will be delivered against a backdrop of a banking industry in crisis and new forecasts that interest rate rises will come to a halt.

The Bank of England is now expected to raise rates just one more time to 4.25pc, from a current level of 4pc.

It comes after US President Joe Biden failed to calm financial markets following the collapse of Silicon Valley Bank (SVB). Rishi Sunak also said British people do not need to worry about the collapse of SVB evolving into a wider banking crisis.

Speaking on a trip to the US, he said: “I think the Bank of England governor was right and the Chancellor was right to address this and make it clear that actually our banks are well capitalised and they don't have any concerns about systemic risk.”

It comes after HSBC rescued SVB’s UK arm in a late-night deal that was announced before markets opened in London.

Later in the day, shares in US banks plummeted as fears of contagion spread and investors grew concerned that governments and regulators had failed to do enough to stem a wave of investors withdrawing deposits.

Stock markets plunged and US borrowing costs fell as the decision by regulators to shut down the bank and take control of deposits sparked a flight to safe assets including gold and government bonds.

The Treasury declined to comment.