The crackdown, expected to be confirmed in the Budget later this month, would see new limits on salary sacrifice pension schemes – arrangements allowing employees to boost their retirement savings before tax is deducted
Under Reeves’s proposals, contributions exceeding £2,000 annually would be liable for standard NI rates(Image: coldsnowstorm via Getty Images)
Rachel Reeves is encountering significant criticism regarding proposals for a potential £2 billion clampdown on pension benefits. Critics caution that such a measure would “punish prudence” and reduce the take-home earnings of millions of employees.
The proposed restrictions, anticipated to be announced in the Budget later this month, would introduce new caps on salary sacrifice pension schemes – arrangements that enable workers to increase their retirement savings before tax deductions. At present, there is no limit on the amount employees can contribute to such schemes before National Insurance is applied.
Under the proposals, contributions exceeding £2,000 annually would be liable for standard NI rates – 8% on earnings below £50,270 and 2% above that threshold. Employers would also forfeit part of their 15% NI exemption on these payments.
Rachel Reeves is encountering significant criticism regarding proposals for a potential £2 billion clampdown on pension benefits(Image: DGLimages via Getty Images)
The Treasury anticipates the measure will generate £2 billion, assisting in addressing what officials describe as a £20-30 billion shortfall in public finances resulting from weaker productivity projections. However, pensions specialists and advisers have criticised the proposal as a short-sighted “tax on working people”.
The proposals – initially reported by The Times – were amongst options outlined in an HMRC consultation earlier this year. The Revenue indicated the £2,000 threshold was “viewed most favourably” by employers, when compared with more comprehensive alternatives such as eliminating all National Insurance exemptions.
However, research by accountancy firm RSM revealed that a worker earning £125,000 who contributes £25,000 of their salary would face an additional £460 in NICs annually – whilst their employer’s expenses would increase by £3,450.
Steve Webb, former Pensions Minister and now a partner at LCP, cautioned that the measure would impact both businesses and savers.
“Salary sacrifice is used as a way of reducing the cost to employers of providing decent pensions. Capping it will further increase employer costs and may well result in employers reconsidering the generosity of their pension offer,” he said. At a time when millions are not saving enough, this is a backward step.”
Eamonn Prendergast, Chartered Financial Adviser at Bromley-based Palantir Financial Planning Ltd, said: “A tax raid on salary sacrifice is a tax on working people, plain and simple. These schemes aren’t loopholes, they’re lifelines for millions who sensibly save for their future.”
“Cutting back on them would hit ordinary workers the hardest, reducing take-home pay and discouraging pension saving at a time when the government should be doing the opposite. Instead of punishing prudence, ministers should be rewarding it because a country that taxes saving is a country that forgets how to grow.”
Rob Mansfield, an Independent Financial Adviser at Rootes Wealth Management in Tonbridge, criticised the government’s approach, stating it was “shooting itself in the foot”. He said: “Salary sacrifice is a great tool for the companies that allow it. It’s particularly convenient for higher-rate taxpayers as full tax relief is given automatically and not enough people claim tax relief through their self-assessments.”
He also speculated on potential changes in the Budget, saying: “One of the Budget rumours is that National Insurance may be cut, which would erode the benefits naturally. It’s in the government’s interest for us all to save properly for retirement, so it’s odd that every Budget they damage confidence by faffing around with pensions.”
Scott Gallacher, Director at Leicester-based Rowley Turton, expressed his concern about the impact on those planning for their future. He said: “A crackdown on salary sacrifice pension schemes would be deeply disappointing and, frankly, counterproductive. Time and again, governments talk about concerns over retirement poverty and Britain’s need to save more for the future.”
He added: “Yet short-term Treasury thinking so often overrides this laudable aim. Instead of encouraging long-term saving and financial resilience, we see a steady erosion of incentives – from limits on tax-free cash to cuts to Capital Gains and dividend allowances.
“Now, even salary sacrifice – a simple, efficient way for ordinary working people to save for retirement – is under threat. If the government is serious about tackling the looming pensions crisis, it needs to stop penalising those who take responsibility for their own financial future.”
