Rachel Reeves has confirmed a tax change that will leave thousands of pension savers £890 a year worse off. The Labour Party Chancellor announced the change in last November's Autumn Budget. Under the new rules, salary sacrifice pension contributions above £2,000 per year will be subject to both employer and employee National Insurance contributions (NICs) from 2029-30.
A new report from the Institute for Fiscal Studies (IFS) found that higher earners are far more likely to make salary sacrifice pension contributions of £2,000 or more annually. The IFS said affected households in the top decile could lose an average of £890 per year due to the policy.
Matthew Oulton, a research economist at the IFS and an author of the report, said: “This change to rules on salary sacrifice pension contributions will likely raise significant tax revenue, principally from higher-earning private sector employees. This additional revenue is a clear motivation for the Government. However, rather than being a principled reform to the taxation of pensions, the change creates another new arbitrary line in the tax system. It does not tackle the fundamental issue with the NICs treatment of pension contributions: the asymmetry between the taxation of employer and employee contributions.”
Oulton added: “A more ambitious reform would have been to replace the blanket exemption of employer pension contributions from employer NICs with a new, less generous subsidy, designed to raise similar revenue to the announced reform. This would improve the coherence of how the Government incentivises pension saving by reducing the asymmetry in tax treatment between employer and employee pension contributions, while also extending incentives for pension saving to groups currently not covered by them, such as employees aged under 21.”
