Rachel Reeves has confirmed a significant change to salary sacrifice rules that is expected to affect nearly three million workers across the UK. The Labour government is planning a £5 billion raid on salary sacrifice schemes starting from April 2029.
Impact on Workers
According to an impact assessment by HMRC, approximately 2.9 million workers are expected to reduce their pension savings as a result of the policy. Among them, 2.2 million higher rate taxpayers will save less, while 666,000 basic rate taxpayers earning less than £50,271 per year will also be affected.
Ms Reeves stated that salary sacrifice was originally intended to be a small part of the pensions system, but noted that costs have tripled from around £2.8 billion in 2016-17 to a projected £8 billion by 2030, with the greatest benefits going to the highest earners.
Policy Details
From April 2029, salary-sacrificed pension contributions above an annual threshold of £2,000 will no longer be exempt from National Insurance contributions (NICs). Reeves described this move as "a pragmatic step" to curb the rising costs of the scheme.
Criticism from Experts
Former pensions minister Sir Steve Webb, who submitted the Freedom of Information request to obtain the HMRC figures, criticized the policy. He said, "The Government has presented the changes to salary sacrifice for pensions as being a relatively painless way of cracking down on a tax break mostly enjoyed by the well off. But these figures show that the effects of the policy will be far more damaging than had previously been admitted."
Sir Steve, now a partner at consultants LCP, added, "At a time when the Government is running a major commission to tackle the issue of pension under-saving, it is shocking that a separate government policy will result in over 2.9 million workers cutting back on pension saving. Nearly 25% of these are basic rate taxpayers. It is hardly ‘joined-up government’ to be stressing the need for more pension saving one day and then implementing a policy that will reduce the pension savings of millions the next."
Government Response
A Treasury spokesman defended the policy, stating, "High earners piled in huge bonuses through salary sacrifice without paying a penny in tax – a taxpayer funded perk largely benefitting the better off. Our fair reforms protect 95% of workers earning under £30,000 using salary sacrifice will be protected, and as IFS analysis shows, over three quarters of under 30s will be unaffected."
