CHANCELLOR Rachel Reeves is reportedly planning a £370 a year pay cut for workers in a “stealth tax raid” on retirement savings.
In her budget later this month Reeves is expected to target salary sacrifice pensions with a cap on how much a worker can deposit tax-free.
Salary sacrifice allows an employee to deposit a share of their income, which is matched by their employer, into a pension scheme and offers a national insurance contribution saving to employer and employee on these deposits.
Reeves is said to be planning to use her budget to limit a tax break on pension contributions for both employers and employees in a bid to raise up to £2 billion a year.
The Chancellor will be delivering her budget plans to the House on November 26.
Concerns have been raised that the move to target pensions could be seriously damaging for company pension schemes.
Instead of targeting lump-sum withdrawals the chancellor is understood to be aiming at salary sacrifice schemes as she tries to plug a gap in the public finances.
At the moment there is no limit to the amount that an employee can put into their pension under salary sacrifice schemes before it becomes subject to national insurance contributions.
However, it is understood Reeves will now try to cap the amount a worker can pay into their pension without incurring national insurance payments.
It is thought that this cap would be put at £2,000 a year.
This means any pension contributions over that cap would be subject to the standard national insurance rate of 8 per cent on a salary of less than £50,000 and 2 per cent on income above that.
It’s recommended employees save at least 15 per cent of their salary for retirement – with concerns raised that people “trying to do the right thing” are being targeted.
People who retire will still be able to make tax-free drawdown payments worth 25 per cent of a total pension pot up to a maximum of £268,275.
Under the new salary sacrifice measure a basic-rate taxpayer earning £50,270 putting 6 per cent of their salary a year into a pension would pay £80 more in national insurance a year.
If they set aside £5,000, equivalent to 10 per cent of their salary, the national insurance hit would be £240.
Experts raised concerns that companies would also lose the tax break that allows them to fund employer pension contributions.
Any employer that runs a salary sacrifice scheme doesn’t currently pay the standard 15 per cent employer national insurance contribution on money that goes into an employees pension – this exemption would now be limited.
As a result of Reeves’s plan the cost to a company for a worker earning £50,270 and putting 10 per cent of their salary into a pension would be £450 more a year, according to Money Week.
Steve Webb, partner at pension consultants LCP, told The Times: “Salary sacrifice schemes have been around for a long time and are a way of encouraging employers to offer good workplace pensions.
“Introducing a cap would increase national insurance bills mostly for employers and hits the very firms who are doing the right thing.
“Once a cap is in place, there will be a widespread expectation that this is the thin end of the wedge and eventual abolition is on the cards. At a time when we need workers and firms to put more focus on pensions, this would be a seriously backward step.”
The news comes despite Labour’s manifesto pledge to leave income tax rates untouched.
Earlier this week she told the budget watchdog that she planned to increase income tax, which would be a breach of Labour’s manifesto.
Reeves’s new plan would see the national insurance savings slapped with a cap at around £2,000 a year.
This means any deposits over that amount would be subject to standard national insurance rates.
Deputy leader of the Labour Party Lucy Powell has reportedly previously warned Reeves that breaking the party’s pledge not to raise income tax would erode the public’s trust.
Reeves previously told the Office for Budget Responsibility (OBR) that an increase in personal taxation is one of the “major measures” she is gearing up to announce later this month.
She is also intending to announce plans to boost economic growth when she delivers her plan to the House of Commons, The Times reports.
The forecaster will analyse the impact of her plans before informing the Treasury of its findings on Monday.
Ms Reeves to due to deliver her Budget plans to the House on November 26.
Her proposals are not set in stone and she could still back away from any possible tax rise.
If income tax is increased though it will break Labour’s manifesto pledge not to increase income tax rates.
