Rachel Reeves plans £2bn-a-year stealth tax raid on non-public sector pensions as she goes after wage sacrifice schemes
Rachel Reeves is planning to launch a stealth tax raid on private sector retirement savings in this month’s Budget which could net her up to £2 billion a year.
In another major blow to British workers, the Chancellor will target salary sacrifice schemes, reducing tax breaks on pension contributions for both employers and employees.
And the raid will only apply to private sector pensions, meaning public sector workers including teachers, civil servants and MPs will be unaffected.
Experts who have dubbed it ‘a seriously backward step’ warn such a move would slash the size of pension pots and reduce take home pay by targeting those saving for their retirement and will add to employer costs. HMRC has also forecast there will be strong opposition from businesses.
The sacrifice schemes, which some businesses could even shut down because of the proposals, currently allow private sector employees to give up part of their pay in return for pension contributions, saving them tax and national insurance.
It is widely expected that the Chancellor will target these schemes on November 26 rather than cutting tax-free lump-sum withdrawals which was also believed to be on the table.
It could lead to people saving less for their retirement, with all those earning salaries over £50,000 affected.
They include those in the £100,000 to £125,000 income bracket, who in recent years have put more of their cash into salary sacrifice schemes to offset the impact of ‘cliff edge’ tax rules, potentially badly hit.
Chancellor of the Exchequer Rachel Reeves will target salary sacrifice schemes, reducing tax breaks on pension contributions for both employers and employees in this month’s Budget
The tax raid is part of the Chancellor’s strategy to plug a £30 billion shortfall which is also set to see her break labour’s manifesto promise of not increasing income tax.
The new deputy leader of the Labour Party, Lucy Powell, has already warned Reeves that breaking the pledge not to raise income tax would erode the public’s trust.
The Office for Budget Responsibility will give the Treasury its verdict on her proposals on Monday.
Under Reeves’ new plan to hit retirement savings, she is expected to cap the amount of pay that can be sacrificed without incurring national insurance payments at £2,000 a year.
Any pension contributions over that level would result in an employee paying the full rate of national insurance of 8 per cent on a salary up to £50,000 and 2 per cent on income above that.
And employers are likely to lose some of the tax breaks which currently allow them to fund employer pension contributions.
Currently, there up to £60,000 tax free limit can be paid into a workplace pension by an employee and their employer without incurring any tax penalties.
And any company that runs a salary sacrifice pension scheme does not pay the 15 per cent rate of national insurance tax on the proportion that goes into workers’ pensions. That means costs to a company for a worker earning £50,270 and putting 10 per cent of their salary into a pension would be £450 more a year.
Steve Webb, partner at the pensions consultancy LCP, told The Times: ‘Salary sacrifice schemes have been around for a long time and are a way of encouraging employers to offer good workplace pensions.
‘Introducing a cap would increase national insurance bills mostly for employers and hits the very firms who are doing the right thing.
‘Once a cap is in place, there will be a widespread expectation that this is the thin end of the wedge and eventual abolition is on the cards. At a time when we need workers and firms to put more focus on pensions, this would be a seriously backward step.’
Steve Hitchiner, chair of the Society of Pension Professionals tax group, said many employers would be forced to make their pension schemes less generous to claw back the additional tax.
Research carried out by HMRC earlier this year revealed companies were strongly against any change with warnings that it would result in a ‘reduction of benefits’ for their workers and could ‘disincentivise saving into a pension’ and affect employee morale.
