Several industry firms have raised concerns over potential changes to salary sacrifice arrangements for pension contributions ahead of the 26 November Budget, amid media reports that Chancellor Rachel Reeves is planning a £4bn tax raid targeting these schemes.
Last week, the Daily Telegraph reported that Reeves may restrict the National Insurance element of salary sacrifice, reducing the amount employees can save and increasing costs for employers.
SPP, Standard Life and Broadstone have since all warned that reforms could reduce take-home pay for millions of employees and increase costs for employers, particularly affecting mid- and higher earners.
The Society of Pension Professionals (SPP) highlighted that around a third of private sector employees and nearly 10 per cent of public sector workers use salary sacrifice, which allows contributions to be made before income tax and National Insurance.
Standard Life noted that limiting tax-free salary sacrifice would make pension contributions more expensive for both employees and companies. Meanwhile, Broadstone added that a proposed £2,000 cap risks undermining recent pension reforms, discouraging contributions during the accumulation phase and potentially reducing retirement savings.
SPP Tax Group chair Steve Hitchiner says: “Changing salary sacrifice arrangements would lead to a reduction in take home pay for millions of employees who are saving into a workplace pension, with the greatest impact for those earning less than £50,284 a year.
“It would also represent another sizeable cost to employers, despite the Chancellor’s public commitment against this, and would undermine the critical role that employers play in supporting and promoting good quality pension saving vehicles.”
Standard Life retirement savings director Mike Ambery says: “This is being billed as a Budget of tough choices, so it isn’t surprising the government is looking at salary sacrifice arrangements, which are typically offered by larger private sector employers. Unlike changes to pensions tax free cash which has some popular understanding, the inner workings of salary sacrifice are poorly understood.
“The changes mooted over the weekend would largely affect middle and higher earners in the private sector who are currently able to reduce their take home pay in exchange for pension contributions that are not subject to income tax or national insurance. By limiting the amount of income that can be sacrificed without paying National Insurance, the government will be increasing the cost of pension contributions to both the individual and the company if the level of contributions is maintained. Ultimately, the impact of National Insurance being paid will be felt in employees’ pockets with less take home pay and in employers’ payrolls with higher costs.
“Of all the changes being floated in relation to pensions this is one of the least impactful but undoubtedly it still comes at a cost to savers. The government is navigating a difficult path while looking to shore up the nation’s finances and at the same time running a Pension Commission designed to increase levels of savings. We hope that a rounded view will be taken at the Budget and that the long-term challenge of ensuring people reach later life with sufficient savings will be kept front of mind in the government’s thinking.”
Broadstone head of policy David Brooks says: “The proposed £2,000 cap on salary sacrifice is a classic case of government departments not joining the dots.
“On one hand, the Pension Schemes Bill is packed with positive reforms: fewer schemes, larger asset pools, a unified value-for-money framework, and better support for savers both during the accumulation phase and as they transition into retirement.
“But this salary sacrifice change risks undermining that progress. It hits the pension growth phase directly. People will feel poorer and many will reduce their contributions. Inertia might help some stay the course, but others, especially those aiming to save enough for a decent retirement, may scale back. Employers will also feel the pinch.
“Lower earners and those on auto-enrolment minimums may not notice much. But anyone contributing meaningfully, often encouraged by planners and policy alike, will.”
