MILLIONS of workers could see their take-home pay cut under Budget plans being weighed up by the Treasury, industry experts have warned.
The Society of Pension Professionals (SPP) has written to all 650 MPs urging the Government not to slash or scrap “salary sacrifice” for pension contributions.
SPP says such a move would hit ordinary earners the hardest and risk denting pension saving just as ministers are trying to fix a looming retirement shortfall.
Salary sacrifice lets workers give up a slice of their gross pay in return for their employer paying the same – or more – straight into their pension.
Because that chunk of pay isn’t subject to National Insurance (NI), both employees and employers save money.
Many firms pass some of their saving back into staff pensions, boosting contributions at no extra cost to workers.
But research commissioned by HMRC and published earlier this year has already floated changes to the rules.
With Rachel Reeves‘ Budget due on November 26, speculation is growing that the Chancellor could restrict or even abolish the perk to plug a hole in the public finances.
HMRC has estimated that National Insurance relief on pension salary sacrifice costs about £4.1billion a year out of a wider £24billion NI relief bill on pensions.
That makes it a tempting target for a cash-strapped Treasury.
But employers and employees overwhelmingly back the current set-up.
The SPP says around a third of private sector employees and nearly one in ten public sector workers use salary sacrifice for pensions.
Ending or curbing it would therefore hit millions, trimming pay packets or forcing people to cut pension contributions to compensate.
Those earning under £50,284, who pay 8% employee NI, would feel the biggest pinch.
How does salary sacrifice work?
SALARY sacrifice is a smart way to boost your pension by officially “giving up” a small part of your earnings.
By lowering your gross salary, you pay less income tax and National Insurance.
In exchange, your employer pays the sacrificed amount directly into your pension.
Why do it?
- Tax savings: You keep more of what you earn (it just goes into your pension pot instead of your bank account today).
- Employer boost: Your boss pays less National Insurance too. Many good employers will add these savings to your pension as an extra bonus.
Royal London says that a worker on £35,000 could get an extra £679 a year in their pension pot without reducing their take-home pay, assuming their boss chips in half of their own National Insurance savings.
What would it cost you?
If the government removed both NI and income tax relief on pay you sacrifice into your pension, a typical worker earning £35,000 and giving up 5% of their salary would end up £560 a year worse off.
If only the National Insurance relief were taken away, the same worker would lose about £210 a year.
If there were a cap so that National Insurance relief was removed only on the portion of sacrificed pay above £2,000 a year, many people would still be out of pocket, although by smaller amounts — roughly £30 in the example.
In HMRC’s study, bosses warned any of the three restriction options would confuse staff, reduce benefits, sap morale and discourage saving.
Some said scrapping both NI and income tax relief would make running salary sacrifice “pointless“.
Steve Hitchiner, chair of SPP’s Tax Group, said: “Changing salary sacrifice arrangements would lead to a reduction in take home pay for millions of employees who are saving into a workplace pension, with the greatest impact for those earning less than £50,284 a year.
“It would also represent another sizeable cost to employers, despite the Chancellor’s public commitment against this, and would undermine the critical role that employers play in supporting and promoting good quality pension saving vehicles.”
A final decision on the Budget plans will not be made until after November 21, when the Office for Budget Responsibility delivers its latest forecast.
The Budget is scheduled for November 26.
Tax and pension contributions
MOST of us see income tax and National Insurance vanish from our payslips every month, but they work very differently when it comes to your retirement pot.
Income tax is charged on standard earnings above your personal allowance, but the government actively encourages you to save for later life by offering “tax relief” on pension contributions.
This effectively refunds the income tax you would have paid on that money.
For a basic rate taxpayer, it means every £80 you pay in is immediately topped up to £100 by the taxman.
Higher earners can claim back even more.
However, National Insurance is different.
It is a payment that builds your entitlement to state benefits, including the state pension.
Ordinarily, you still have to pay National Insurance on the money you put into your private pension, which is why “salary sacrifice” schemes are so popular, as they are one of the few ways to legally bypass this cost.
Be aware that you cannot stash unlimited cash away tax-free.
Most savers currently have an annual allowance of £60,000, or 100% of their yearly earnings – whichever is lower – before the taxman steps back in.
What other budget changes are being mulled?
Ministers are considering extending the “stealth tax” freeze on income tax thresholds to 2030, which would quietly pull more pay into higher bands as wages rise.
According to Quilter, people earning between £20,000 and £40,000 would pay around £214 more in income tax by 2029–30 because of this freeze.
Meanwhile, a 2p hike to the basic rate of income tax has been floated alongside a 2p cut to National Insurance, easing the hit for workers but leaving many pensioners worse off because they do not pay NI.
In this scenario, a pensioner on £35,000 a year would pay about £449 more in tax each year.
A worker on the same salary would see little or no change.
Pensions could also face a squeeze, with talk of cutting higher‑rate tax relief and even reducing the 25% tax‑free lump sum at retirement.
Property is in the crosshairs too, with proposals to overhaul council tax for higher‑value homes.
Options include doubling rates for Bands G and H or adding new bands above them.
A Band G bill could rise from about £3,800 to about £7,600, and a Band H bill could rise from about £4,560 to about £9,120.
The IFS says the plan could raise £4.2billion a year by the end of the decade.
Another option is an annual levy or “mansion tax” on properties worth £2million or more, which would charge 1% on the value above the threshold each year.
For a £3million home, that would mean a yearly bill of about £10,000.
The government is also mulling removing capital gains tax (CGT) relief for pricier main homes.
If the proposals are correct, sales of main residences worth £1.5million or more would face CGT.
