According to Financial Times News, Chancellor Rachel Reeves is planning a £2bn raid on UK retirement savings by reducing tax benefits from salary sacrifice pension schemes ahead of this month’s Budget. The policy targets the estimated £30bn hole in public finances partly caused by productivity downgrades from the Office for Budget Responsibility. Reeves will introduce a £2,000 threshold for tax-free salary sacrifice contributions, above which employees will pay national insurance at normal rates – 8% under £50,270 and 2% above that. Government figures confirmed the salary sacrifice changes while denying speculation about cuts to tax-free pension lump-sum withdrawals. The Treasury has chosen the £2,000 cap option that was viewed most favorably by employers in a recent HMRC consultation.
The employer impact
Here’s the thing – this isn’t just about individual savers. Employers are about to get hit hard too. Steve Webb from pension consultants LCP told the Financial Times that salary sacrifice actually reduces employer costs for providing decent pensions. And now they’re facing another cost increase on top of last year’s hike in employer NICs. Companies currently don’t pay the usual 15% employer NICs on the portion of wages going into pensions, but that exemption is also getting limited under Reeves’ plan. Basically, employers are looking at higher costs and more administrative headaches. Some surveyed by HMRC actually called this the most complicated of the three scenarios they considered. You have to wonder – will this make companies rethink their pension offerings entirely?
Who really pays?
Now, the government’s selling this as having minimal impact on average workers. HMRC’s own examples show someone earning £35,000 sacrificing 5% of salary would pay nothing extra. Even at £45,000 with 5% sacrifice, we’re talking about £30 annually. But look at the high earners – that’s where the real money is. Accountancy firm RSM calculated that someone earning £125,000 saving £25,000 into their pension would pay £460 more in NICs, while their employer would pay an extra £3,450. That’s not exactly trivial. And it specifically targets people between £100,000 and £125,140 who’ve been using salary sacrifice to avoid that brutal 60% marginal tax rate cliff-edge. So basically, this is another stealth tax on higher earners disguised as pension reform.
The bigger picture
So what does this actually mean for retirement savings in the UK? We’re already facing a pension savings crisis with millions not saving enough. As Webb put it, “this is a backward step.” Employers surveyed by HMRC were concerned these changes would “disincentivise saving into a pension.” And we’re already seeing some people pulling money out of their pensions preemptively over fears of more raids. The government’s caught between needing revenue and not wanting to kill the golden goose of pension savings. But when you start tinkering with incentives that have worked for decades, you risk unintended consequences. Will this £2bn short-term gain lead to billions in future pension poverty? That’s the real question nobody seems to be asking.
