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A Budget tax raid on salary sacrifice schemes is set to raise £3bn-£4bn, hitting businesses and encouraging employers to cut pension payments to staff.
The move from chancellor Rachel Reeves is expected to be one of the biggest measures in next week’s Budget, with people briefed on the plans now forecasting it will raise more than the £2bn previously floated.
The plan would reduce the amount of money people can sacrifice from their pay cheques to put in their pension pots without paying national insurance.
It faces a strong pushback from businesses, which are set to bear the brunt of the tax rise and have already seen costs soar as a result of the chancellor’s decision to increase national insurance for employers in last year’s budget.
Last week, Reeves reversed course on plans to break Labour’s manifesto commitment by increasing income tax after weeks of preparing the ground for the move, in a shock decision that rattled the markets and placed the focus on other revenue raising measures.
The government had previously floated setting the threshold at which people could sacrifice their salary while still obtaining the tax benefit at £2,000 a year, which people close to the plans said would raise around £2bn a year.
It is unclear how exactly the benefit will be pared back further to reach the savings the Treasury is currently targeting.
National insurance is charged at 15 per cent for employers and 8 per cent on earnings less than £50,270 and 2 per cent on income above that.
A person briefed on the chancellor’s thinking said Reeves had been “clear she wants to ensure the tax system is fair and sustainable, while protecting ordinary workers and supporting pension savings”, adding that salary sacrifice is not available to all workers such as those near the National Living Wage and the self-employed.
They also pointed to the fact that experts at think-tanks, including the Institute for Fiscal Studies, had described the salary sacrifice system as a “bizarre, complex and opaque practice”.
The move to raid salary sacrifice schemes has met fierce opposition from pension experts as well as business groups, who warn it will store up problems for the future by reducing the amount people save for their retirement — with millions of workers already on track to face poverty when they stop working.
Around 5mn basic-rate taxpayers currently benefit from salary sacrifice schemes for their pension contributions and a cap could bring many of them into the potential Budget change, especially if it was set low.
“It is hard to see how such a policy would be consistent with a government objective to protect ‘ordinary working people’,” said Sir Steve Webb, Liberal Democrat pensions minister in the 2010-15 coalition government and partner at pensions consultancy LCP.
Craig Beaumont, external affairs director at the Federation of Small Business, said: “The chancellor promised not to come back for more but attacking salary sacrifice, which has been in place for 40 years to help employers help their staff, will impact business and their staff.”
Anna Leach, chief economist at the Institute of Directors, said: “This is another hit on business as it increases complexity and is another burden when they really don’t need it.”
A survey of more than 300 human resources directors this week by the Reward and Employee Benefits Association found that almost a third of UK businesses said they would cut staff pension payments if the cap for salary sacrifice tax relief was set at £2,000 a year.
A further 45 per cent said they would slash other employee benefits or services if Reeves implemented the policy at the Budget next week.
The Treasury declined to comment.
Additional reporting by Claer Barrett, Ramsay Hodgson and Ashley Armstrong
