The Chancellor is facing pressure to raise billions of pounds to fund extra spending and cover rising borrowing costs. To address this, HMRC is exploring changes to the salary sacrifice system used by pension savers. This system allows employees to reduce their wages in exchange for increased pension contributions, which lowers their tax and National Insurance liabilities.
HMRC commissioned research to evaluate three potential changes to salary sacrifice arrangements. The findings suggest that employees on a £35,000 annual salary could lose over £500 if the government decides to raise more tax revenue from pension savings. One scenario proposed removing the National Insurance exemption for salary sacrifice pensions.
This would result in an employee on a £35,000 salary paying an extra £210 in National Insurance, while their employer would pay an additional £242. Another option involved removing both the National Insurance and income tax exemptions, leading to the employee paying an extra £560 in combined taxes, and the employer again paying an additional £242 in National Insurance.
Evaluating pension tax adjustments
A third option suggested only removing the National Insurance exemption for salary sacrifices exceeding £2,000 per year. Former pensions minister Sir Steve Webb noted that HMRC’s consultation placed a potential tax raid “firmly on the agenda.” He believes that with the Chancellor looking to plug a multibillion-pound gap in the public finances for the autumn Budget, changes to salary sacrifice schemes are likely to be considered. Jonathan Watts-Lay from financial wellbeing and retirement specialists Wealth at Work described the move as a “stealth tax,” arguing that it would negatively impact everyone.
He explained that unless individuals increase their pension contributions, the proposed changes would result in smaller pension pots upon retirement. Chancellor Rachel Reeves is also tasked with finding funding to support the government’s reversal on axing winter fuel payments for millions of pensioners. Additionally, both the Chancellor and Prime Minister Sir Keir Starmer are under pressure from Labour MPs to reverse other planned welfare cuts.
A Treasury spokesperson responded to the speculation, stating: “These claims are totally speculative. HMRC regularly commissions independent research on all aspects of the tax system. We are committed to keeping taxes for working people as low as possible.”
