Chancellor Rachel Reeves is poised to unveil a significant tax overhaul in Wednesday's Budget, with reports indicating a potential crackdown on salary sacrifice schemes for pensions. This move has sparked fears that the retirement savings of millions could be jeopardised, drawing sharp criticism from pensions industry bodies who warn it could accelerate a looming retirement crisis.
How Salary Sacrifice Schemes Work and What's at Stake
Salary sacrifice schemes allow employees to exchange a portion of their pre-tax salary for an employer-provided benefit, most commonly pension contributions. This arrangement offers a tax-efficient way for workers to boost their retirement pots, as both employee and employer benefit from lower National Insurance contributions. The employer pays the sacrificed amount directly into the pension fund.
Reports suggest the Budget may introduce a cap limiting the amount individuals can sacrifice while still receiving tax benefits to around £2,000 per year. Some analysts believe restrictions could extend even further, potentially reshaping retirement planning for countless workers.
Industry Bodies Issue Stark Warnings
The Association of British Insurers (ABI) and major pensions providers have urgently appealed to Chancellor Reeves to reconsider any such measures. They argue that curbing these schemes would discourage both people and employers from contributing to pensions, storing up significant problems for future retirees.
Yvonne Braun, director of policy for long-term savings at the ABI, delivered a particularly stark assessment: "The industry has long-warned that we're 'sleep-walking' into a retirement crisis. If the Government goes ahead with suggestions to cap salary sacrifice, then we're no longer sleep-walking, we're speed-walking."
The Reward and Employee Benefits Association (REBA) has echoed these concerns, warning that restricting salary sacrifice would place additional strain on businesses and potentially push millions into poorer retirements.
The Broader Retirement Landscape and Government Motives
This potential policy change comes against a troubling backdrop for retirement savings. Despite automatic enrolment bringing millions into pension saving, many workers aren't saving enough to secure a comfortable retirement. The shift away from final salary schemes in the private sector has transferred investment risk to individual savers, while recent cost-of-living pressures have further hampered people's ability to save.
The Government's motivation appears financial. Estimates suggest restricting salary sacrifice could generate between £2 billion and £4 billion in additional revenue, depending on how severely the schemes are curtailed.
Meanwhile, the state pension is set for positive news with an expected 4.8% increase next April under the triple lock mechanism. This would bring the full new state pension to approximately £12,548 annually. However, pensions director Steven Cameron at Aegon highlighted a coming complication: "Those with solely a state pension could face receiving letters from the taxman demanding they pay the tax due" as the state pension surpasses the frozen personal allowance.
