The Labour government is facing strong criticism over its proposal to introduce a new cap on pension salary sacrifice, a move industry experts warn could severely impact the retirement plans of millions across the UK.
What is the Proposed Cap?
According to reports, HM Revenue & Customs (HMRC) is set to introduce a new £2,000 allowance for salary sacrifice arrangements. This would limit the amount employees can sacrifice from their salary into their pension pots before losing valuable National Insurance (NI) benefits.
Chris Eastwood, chief executive and co-founder of the pension provider Penfold, has been vocal in his opposition. He told GB News that the proposal would be "deeply disappointing" and would create another barrier to retirement saving for millions of workers.
Why is Salary Sacrifice Important?
Salary sacrifice is a popular and efficient agreement between an employee and their employer. Instead of receiving part of your salary as taxable pay, you redirect it into a non-cash benefit, most commonly a workplace pension.
The system offers a triple win:
- Employees pay less income tax and National Insurance.
- Employers save on their own NI contributions.
- Many employers then reinvest their savings back into the employee's pension, providing a further boost.
Mr Eastwood emphasised the scheme's power, stating: "All the auto enrollment minimums are too low, and salary sacrifice is one of those things that's really powerful and effective to actually encourage individuals to save more in excess of those minimums."
The Financial Impact and Government's Stance
The government's motivation for the change is primarily fiscal. Official figures from HMRC reveal that salary sacrifice on pension schemes currently costs the Treasury £4.1 billion in lost National Insurance payments annually. This is split between £1.2 billion from employees and £2.9 billion from employers.
By restricting the NI contribution benefit for pension salary sacrifice above £2,000, the government estimates it will raise approximately £2 billion. However, this short-term revenue gain is being weighed against long-term consequences.
Eastwood cautioned, "Let's balance short term with long term. There's clearly short term needs around fiscal black holes and raising revenue, but paired with that, we have a long term pension savings crisis." He also noted that for businesses, this change would be "another hit, having just had NI rates gone up."
Despite the concerning news, his final advice to savers was clear: "Don't panic, and don't rush decisions." The proposal, while likely, is not yet confirmed, and the full details are awaited.
