Pension tax raid from Rachel Reeves ‘far more damaging than previously admitted’ as millions at risk

LCP Partner Steve Webb submitted the Freedom of Information (FOI) to the tax authority, which initially declined to answer certain questions, citing that the information related to policy development.

Following an appeal, HM Revenue and Customs (HMRC) released additional data in May.

The incoming policy will impose a £2,000 ceiling on employee pension contributions that can be made via salary sacrifice while remaining exempt from both employee and employer National Insurance contributions.

Of those expected to reduce their pension saving, approximately 666,000 are basic rate taxpayers, representing nearly one in four of the total affected workforce.

The majority of workers earning above the Upper Earnings Limit, currently set at £50,270 annually, are likely to be higher rate taxpayers.

However, analysis from the Office for Budget Responsibility (OBR) suggests that lower earners will make the most substantial reductions to their contributions.

The OBR’s assessment identifies this behavioural shift as a key consequence of the salary sacrifice changes, with workers likely to save less into pensions to offset increased National Insurance costs and protect their take-home pay.

Mr Webb condemned the policy as fundamentally at odds with the Government’s own efforts to address inadequate retirement saving.

The Government’s Pensions Commission has estimated that roughly 15 million working-age people are already failing to save enough for retirement, even before these new restrictions take effect.

He said: “The Government has presented the changes to salary sacrifice for pensions as being a relatively painless way of cracking down on a tax break mostly enjoyed by the well off.”

“But these figures show that the effects of the policy will be far more damaging than had previously been admitted.

“It is hardly ‘joined-up government’ to be stressing the need for more pension saving one day and then implementing a policy that will reduce the pension savings of millions the next.”

A Treasury spokesperson said: “High earners piled in huge bonuses through salary sacrifice without paying a penny in tax – a taxpayer funded perk largely benefitting the better off.

“Our fair reforms protect 95 per cent of workers earning under £30,000 using salary sacrifice, and as IFS analysis shows, over three quarters of under 30s will be unaffected.”