A new HMRC salary sacrifice rule change is set to leave one million households nearly £900 a year worse off. Labour Party Chancellor Rachel Reeves has launched a tax raid on salary sacrifice schemes, targeting pension contributions.
Impact of the New Cap
The Institute for Fiscal Studies (IFS) has warned that the changes, which will introduce a £2,000 cap on the amount workers can pay into their pension via salary sacrifice before contributions are liable for National Insurance (NI), will affect 4.7 million employees when they come into force in April 2029.
According to the IFS, the top 10% of earners will be hit hardest, with around one million households losing an average of £888 per year. Overall, affected households will be £540 worse off on average, the think tank calculated.
Reactions from Experts
Sir Steve Webb, a partner at LCP and former pensions minister, said: “The policy doesn’t just affect people putting thousands into pensions. It affects people on modest wages, who may not be putting much in a pension, but whose pay just gets held down for possibly years because of all of this.”
Webb, who created the Triple Lock metric, added that the changes would force businesses “to divert time and energy to recouping the costs and perhaps rearranging their pensions instead of getting on with the day job of creating jobs and growth”.
Matthew Oulton, a research economist at the IFS, commented: “Rather than being a principled reform to the taxation of pensions, the change creates another new arbitrary line in the tax system.”
Government Response
The Government said it did not recognise the figures and that the “vast majority” of people would not be affected.
