The Chancellor Rachel Reeves (Image: Getty)
Rachel Reeves’s cap on pensions contributions looks set to leave millions of workers poorer in retirement, according to official figures revealed through a Freedom of Information (FOI) request. From April 2029, the government is introducing a £2,000 limit on the amount that is exempt from National Insurance contributions (NICs) for employee contributions made via salary sacrifice.
When the Treasury announced the changes, it pointed to HM Revenue & Customs figures estimating that 7.7 million employees use salary sacrifice to make pension contributions, with 3.3 million of them sacrificing a figure in excess of £2,000, and some 4.3million workers not directly affected. The GOV.UK website says the costs of relief through salary sacrifice “relate disproportionately to pension contributions from those on higher incomes”.
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The Government says by introducing a cap the system is “fairer and more sustainable”, and it “means that any salary sacrificed above the £2,000 cap is treated the same for tax purposes as other pension scheme arrangements”.
It estimated the move to raise £4.7billion for the public finances in the first year by taxing high earners above the threshold, with the figure markedly reducing as people adjust their saving behaviour.
They argue that most employees making typical pension contributions and their employers won’t be affected. But the HMRC‘s own figures, obtained via an FOI submitted by former pensions minister Sir Steve Webb reveal the vast scale of Britons expected to simply slash their pension contributions in a salary sacrifice exodus.
HMRC estimates that almost 2.9 million people will cut them once the salary sacrifice curb is introduced, facing tax and lower savings growth on the money.
Of the 2.9million, some 2.2 million are higher-rate taxpayers, but around a quarter (666,000) are basic-rate earners taking home less than £50,271 a year.
Sir Steve, a former Lib Dem MP who served in David Cameron’s Coalition Government and is now a partner at LCP consultants, told the Telegraph: “The Government has presented the changes to salary sacrifice for pensions as being a relatively painless way of cracking down on a tax break mostly enjoyed by the well-off.
“But these figures show that the effects of the policy will be far more damaging than had previously been admitted.”
It comes as the Government makes concerted efforts to make Britons save more, not less, in a bid to reduce the cost burden of the state pension. Less than a month ago, a major government-commissioned review warned that 15 million people aren’t saving enough for their post-work years, with middle earners, women and the self-employed among the most at risk.
Sir Steve took aim at what he sees as the counterproductive effect of the new salary sacrifice policy.
“At a time when the Government is running a major commission to tackle the issue of pension under-saving, it is shocking that a separate government policy will result in over 2.9 million workers cutting back on pension saving,” he argued. “Nearly 25% of these are basic rate taxpayers.”
An HM Treasury spokesman said: “High earners piled in huge bonuses through salary sacrifice without paying a penny in tax – a taxpayer-funded perk largely benefitting the better off.
“Our fair reforms protect 95% of workers earning under £30,000 using salary sacrifice”, they added, saying that “as IFS analysis shows, over three quarters of under 30s will be unaffected”.
