Chancellor Rachel Reeves is preparing a significant change to the UK pension system that could generate billions for the Treasury, despite previous assurances about protecting workers' financial interests.
The Proposed Changes
The Labour government's plan would reduce the amount employees can sacrifice from their salary to put into their pension pots without paying National Insurance contributions. While the government had previously considered setting this threshold at £2,000 annually, which would raise approximately £2bn, the current proposal is expected to generate between £3bn and £4bn annually.
A source familiar with the Chancellor's thinking stated that Reeves aims to create a fair and sustainable tax system while protecting ordinary workers and supporting pension savings. The argument presented is that salary sacrifice arrangements are not equally accessible, particularly disadvantaging those earning near the National Living Wage and self-employed workers who cannot utilise such schemes.
Industry Backlash and Concerns
The proposal has sparked significant opposition from business groups and pension experts. Pensions UK and the Federation of Small Businesses have sent a joint letter to Chancellor Reeves urging her not to proceed with curbing salary sacrifice schemes or wider pensions tax relief.
Craig Beaumont, External Affairs Director at the Federation of Small Business, expressed concern that attacking salary sacrifice after 40 years of operation would negatively impact both businesses and their staff. He emphasised that the Chancellor had previously promised not to seek additional revenue through such measures.
Sir Steve Webb, former Liberal Democrats pensions minister during the 2010-15 coalition government and current partner at pensions consultancy LCP, questioned how such a policy aligns with government objectives to protect ordinary working people.
Impact on Lower Earners and Auto-Enrolment
The joint letter to the Chancellor highlighted that limiting salary sacrifice would particularly affect working people trying to save for a better retirement, including those on lower-than-average earnings. In the context of auto-enrolment, many employers use salary sacrifice to boost contributions for lower-earning workers enrolled in defined contribution schemes.
Evidence from the government-backed Nest scheme shows that nearly half of large employers contribute above the statutory minimum rate of 3%, with over 14% covering the full minimum contribution of 8%. The letter warned that if salary sacrifice is removed, lower-earning workers would likely experience reduced employer generosity and higher deductions from their pay.
Anna Leach, chief economist at the Institute of Directors, described the proposal as another burden on businesses that increases complexity at a time when companies are already facing significant challenges.
The collective message to the government is clear: Britain cannot afford to swap pension stability for short-term revenue raisers that undermine long-term financial security for working people.
