Chancellor Targets Pension Tax Perk in November Budget
Chancellor Rachel Reeves is preparing a significant overhaul of pension tax rules, with new plans set to be unveiled in the Autumn Budget on November 26. The proposed changes specifically target salary sacrifice arrangements, a popular method used by millions to boost their retirement savings.
Currently, both employees and employers avoid paying National Insurance contributions on income that is diverted into a pension through these schemes. This has made salary sacrifice a highly tax-efficient option for retirement planning.
Understanding the Proposed £2,000 Cap
The central reform involves introducing a strict cap on this National Insurance exemption. Under the new system, the relief would be limited to £2,000 per employee per year.
Any pension contributions made through salary sacrifice beyond this threshold would be subject to standard National Insurance rates. This means most workers would face an 8% charge, while higher earners would pay 2% on contributions exceeding the limit.
Financial expert Nick Sudbury from Fidelity International explained the current appeal, stating: "Many employees choose to ‘sacrifice’ part of their salary in exchange for higher contributions into their workplace pension. This can be tax-efficient for both the employee and the employer, as pension contributions - unlike salary payments - are not subject to income tax or National Insurance."
Potential Consequences for Savers and Businesses
The move is expected to generate significant controversy. Analysis from Croner-i Tax and Accounting suggests that previous Chancellors have avoided this 'low hanging fruit' due to the potential backlash and the desire to encourage retirement saving.
The implications extend beyond just pension savings. The changes could also impact employees using salary sacrifice schemes to lease electric vehicles, a benefit previously encouraged as part of the UK's net zero strategy.
Croner-i further warned that such a change would reduce incentives for employers to offer salary sacrifice schemes and could discourage employees from making adequate provision for their retirement. Employers would also face new administrative burdens, having to calculate NI on any contributions that exceed the proposed threshold.
With the Autumn Budget just weeks away, both employers and employees are advised to watch this space closely, as these changes could reshape retirement planning strategies across the UK.
