Chancellor Rachel Reeves is reportedly considering introducing a cap on salary sacrifice pension contributions as part of her Autumn Budget at the end of this month, in a move that could raise up to £4bn for the Treasury.
Salary sacrifice enables employees to exchange part of their salary for employer pension contributions in a bid to reduce their income tax and National Insurance liabilities. This, in turn, allows employees to build their savings or contribute more to childcare costs and student loans.
It is also beneficial for the employer, as it reduces their National Insurance contributions for employees.
Although it helps employees boost their retirement savings, its generous tax treatment has drawn the attention of Reeves as she looks to close a £40bn fiscal shortfall, with rumours circulating that she will introduce a cap of £2,000 a year.
For someone earning the UK average £35,000 a year and contributing 5% to their pension, this would result in them losing £210 due to the new tax cap.
Rachel Vahey, head of public policy at AJ Bell, said that any changes are “likely to go down very badly with employers”.
Indeed, HMRC-commissioned research earlier this year outlined different scenarios for reforming pensions salary sacrifice. Employers reacted negatively to all of them, arguing that removing reliefs would wipe away the financial benefits of salary sacrifice and also result in lower pension savings at a time where retiring in poverty is increasingly a concern.
“Any potential changes to pensions salary sacrifice should not only take account of the immediate impact but also consider what it means for the future of pension savings and Brits’ retirement income,” Vahey said.
“Given the significance of this issue, it makes sense to leave such a major decision until the Pensions Commission has concluded its work.”
Greg Davies, head of behavioural finance at Oxford Risk, agreed, noting that salary sacrifice is “behavioural design done right” as it “makes saving automatic”.