Chancellor Rachel Reeves is reportedly eyeing a £4bn tax grab by tightening the rules around salary sacrifice schemes on pensions.
Any change in this month’s Budget would hit both employees and employers. When employees chose to divert salary into a pension, using a salary sacrifice scheme, they do not pay income tax or NI on these contributions. The employer can also make national insurance savings.
Last year the cost of NI relief on salary sacrifice topped £4bn, a figure that has increased by around £1bn in five years according to the HMRC. The number of employers enquiring about salary sacrifice arrangements has reportedly risen significantly since Reeves increased the employer National Insurance rate in the last Budget.
According to reports in The Daily Telegraph, the Treasury is exploring introducing limits on the amount that can be paid into salary sacrifice schemes, focused on limiting the NI savings made by businesses and their workers.
The speculation follows news that HMRC has commissioned research into how employers might respond to potential reforms in this area — fuelling expectations that salary sacrifice could feature in the upcoming Budget.
The Daily Telegraph reported that Treasury officials have highlighted that these schemes tend to benefit larger employers due to administrative costs, and that higher-rate taxpayers receive a disproportionate share of the relief. The government has previously said that it wants those with the “broadest shoulders” to bear the brunt of future tax increases.
Former pensions minister and LCP partner Sir Steve Webb said that while this remained speculation, this latest rumour had “the ring of the truth about it”, not least because it aligns with recent HMRC research and think-tank recommendations.
However warned that scrapping salary sacrifice altogether could discourage pension saving and damage retirement adequacy.
“Previously governments have allowed salary sacrifice for pension contributions to encourage firms to provide good pensions,” he says. “If it was abolished, it would penalise the best employers and make it less attractive to offer decent pensions. A more modest reform would be to cap the amount that can be sacrificed, and HMRC have tested employer opinion on this option as well.”
Analysis by LCP suggests that over three million basic-rate taxpayers could lose out if the scheme were scrapped entirely. However, capping the relief at £2,000 per year would shield average workers and employers from higher NI costs. Under such a cap, HMRC estimates that someone earning £45,000 and sacrificing 5 per cent of their salary would pay an extra £30 in NI, while their employer’s bill would rise by just £34.
Reform of salary sacrifice schemes has been advocated by several organisations, including the Resolution Foundation — formerly led by current pensions minister Torsten Bell — and the Institute for Fiscal Studies.
