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The government’s plan to cap the tax benefits of salary sacrifice schemes will erode trust in the savings system and strike a “reckless” hit on businesses and jobs, according to opposition parties and pensions experts.
In salary sacrifice schemes, staff agree to give up some of their wages in return for other benefits, typically pension contributions. This lowers their headline salary so they and their employer pay less national insurance.
Employees can currently put up to £60,000 into their salary sacrifice pension scheme per year, and the tax relief is available on the whole of that contribution. But Reeves is set to introduce a new threshold of £2,000, above which contributions will incur national insurance at the usual rates — 8 per cent on salaries under £50,270 and 2 per cent on income above that.
The Treasury estimates the move will raise £2bn per year.
It would be the second national insurance blow to businesses after employers’ contribution rate was raised to 15 per cent in April and the threshold at which it is levied was lowered in a move that opponents dubbed the “jobs tax”.
“If Rachel Reeves really is planning to cap salary sacrifice relief, it’s another reckless hit on business and jobs,” said shadow Chancellor Mel Stride.
Daisy Cooper, the Liberal Democrats’ Treasury spokesperson, said that it “looks like it could be the jobs tax all over again — namely a short-term Treasury tax grab that has no regard to the longer-term impacts on people’s future pensions”.
Figures published by the Office for National Statistics in 2019 found that 30 per cent of private sector employees made use of salary sacrifice arrangements, compared to less than 10 per cent of public sector workers.
Accountancy firm RSM estimated that Reeves’ plan could result in an employer paying £3,450 a year more in NICs for someone who earns £125,000 and saves £25,000 of this directly into their pension, while the cost to the employee would be an additional £460.
Someone earning £45,000 and sacrificing 5 per cent of their salary would pay an additional £30 a year in national insurance and their employer would pay an extra £34, according to RSM.
“It is hard to see this as anything other than another jobs tax,” said Tom McPhail, an independent pensions consultant, adding that it “betrays the incoherence of this government, punishing pension savers while at the same time launching a pension commission to look at how to boost retirement savings adequacy”.
Among those who will be hit hardest by the change include those earning between £100,000 and £125,140, who face a marginal tax rate of 60 per cent as the personal allowance for income tax tapers down. Many currently use salary sacrifice to suppress their headline earnings and thus avoid the tax cliff edge.
But Tom Selby, director of public policy at AJ Bell, said salary sacrifice would “still stack up for a lot of people” who lower their salaries in order to gain free childcare. The government offers 30 hours of free care per week for children between the ages of 9 months and 4 years when both parents earn under £100,000 per year.
Industry bodies have warned that the changes would undermine savers’ confidence in the pensions system and the government’s broader goal of directing more retirement money into the UK economy.
“Constant speculation about and tinkering with pension policy damages confidence in the entire pension system, fuels confusion and leads to real financial harm where savers act on uncertainty,” said Yvonne Braun, director of long-term savings at the Association for British Insurers.
Research by the ABI and the Reward and Employee Benefits Association last year found that nearly half of employers which pay above the minimum employer pension contribution of 3 per cent would consider reducing their contributions if national insurance was introduced on employers’ pension payments.
Zoe Alexander, executive director at the Pensions UK trade group, said pension schemes were working “constructively” with the government to encourage economic growth. “It is critical that in return the pension system is kept stable and predictable, in ways that employers and savers rightly expect,” she said.
