Millions of British workers face seeing their retirement savings drastically reduced if the Chancellor proceeds with a reported £4 billion Budget raid on pension schemes. Rachel Reeves is considering plans to limit the amount employees can sacrifice from their salaries to boost their pension pots without incurring National Insurance charges.
The Mechanics of the Proposed Raid
Currently, National Insurance is charged at 15% for employers and at 8% on employee earnings below £50,270, with 2% on income above that threshold. The proposed change would see these charges applied to pension salary sacrifice arrangements above a new cap, effectively making it more expensive for workers to save for their future.
A survey conducted by the Confederation for British Industry (CBI) reveals a bleak outlook for employees if these changes are implemented. The survey, which included major firms such as DHL, Shell, NatWest, Tesco, and BAE Systems, found that an overwhelming 74% of firms would not increase their employer contributions to offset the new tax liability faced by their staff. A mere 13% said they would consider topping up contributions.
Consequences for Retirement Savings
The financial impact on individual savers could be severe. According to a CBI analysis, a 22-year-old man on the median income of £37,382, contributing 9% annually towards his pension, could expect to retire with a pot of £223,297. However, if an employer reduces its contribution by just 1% in response to the new rules, the final pension pot would plummet to £198,486—a staggering reduction of almost £25,000. The loss would be even greater for higher-rate taxpayers.
Rain Newton-Smith, the CBI's director-general, issued a stark warning, stating that this move risks 'putting up the cost of employment' once again, following last year's hike in employer's National Insurance contributions. She emphasised that 'a stealth tax on pensions risks' causing businesses to reduce headcount and scale back investment, calling it 'a tax on doing the right thing'.
Industry Backlash and Long-Term Risks
The business community has reacted with strong criticism. One company surveyed described the potential raid as a 'stealth tax that punishes firms for helping people save for retirement'. Another labelled it a 'terrible idea' that would make saving for the future harder at a precarious time.
Ms. Newton-Smith also highlighted the contradictory timing of the proposal, noting that the Government's own Pensions Commission is currently examining how to tackle the problem of under-saving for retirement. She argued that introducing a 'short-sighted revenue-raising measure now would pre-empt its work and could cost more in the long-run', potentially creating a larger burden on the state in future decades.
