Chancellor's Controversial Budget Move Targets Salary Sacrifice
Chancellor Rachel Reeves is believed to be preparing a controversial tax raid on salary sacrifice schemes as part of a wider package of tax rises expected in the budget. The move has sparked significant concern among financial experts and pensions providers, who warn it could put people's retirements at risk and increase the tax burden for employees and employers alike.
How Salary Sacrifice Works and Why It's Under Threat
Salary sacrifice schemes allow employees to exchange a portion of their pre-tax salary for benefits such as pension contributions, company cars, cycle-to-work programmes, childcare vouchers or healthcare. Because the sacrificed amount comes from gross salary before tax and National Insurance calculations, both employees and employers benefit from reduced tax bills.
Financial journalist and Money Clinic podcast host Claer Barrett warned her Instagram followers that younger workers' retirement prospects would be "decimated" by such a change, noting it would be particularly damaging for working parents navigating complex tax thresholds.
As Charlene Young, pensions and savings expert at AJ Bell, explains: "The main benefit to pension savers is that employee NI does not eat into their contributions. But the agreements do involve a cut on paper to someone's pay, which could be important when it comes to things like being approved for a mortgage."
The Proposed Changes and Their Impact
The chancellor is reportedly considering capping the amount of salary that can be sacrificed without paying National Insurance at £2,000 per year. Some estimates suggest this change could raise up to £4 billion for government coffers.
While those earning up to £40,000 annually and sacrificing the minimum 5% into their pensions would likely be unaffected, higher earners could face significant financial consequences.
Financial services company Fidelity provides a clear example: someone earning £105,000 wanting to bring their taxable income below £100,000 might currently sacrifice £10,000 into their pension. Under the proposed cap, National Insurance would become payable on £8,000 of that amount, resulting in an additional £160 annual NI bill for the employee and an extra £1,200 for their employer.
Industry Warnings of a Looming Retirement Crisis
The Association of British Insurers and major pensions providers have urgently called on the chancellor to reconsider, warning that the next generation of retirees already risks being poorer than today's pensioners.
Yvonne Braun, director of policy for long-term savings at the ABI, issued a stark warning: "The industry has long-warned that we're 'sleep-walking' into a retirement crisis. If the government goes ahead with suggestions to cap salary sacrifice, then we're no longer sleepwalking, we're speedwalking."
Analysis by AJ Bell reveals the potential scale of the damage: a 35-year-old earning £50,000 could see a £22,060 shortfall in their pension pot by age 65. This black hole increases to more than £37,000 for those earning £75,000 and nearly £50,000 for those on £100,000 annually.
Pensions industry bodies caution that the changes could lead to both individuals and employers reducing pension contributions, creating future problems for savers while increasing cost pressures on businesses during a challenging economic period.
