Rachel Reeves Faces Backlash Over Proposed Pension Changes to Fund Welfare Spending
Chancellor Rachel Reeves is planning to target middle-class pensions this week in an effort to finance another welfare initiative. The proposed move would see a £3 billion cut to the ‘salary-sacrifice’ pension schemes used by millions of private-sector workers, aimed at funding Labour’s plan to remove the two-child benefit cap.
Experts have warned that the changes could deal a major blow to private-sector pensions, which already lag behind the generous arrangements available in the public sector. Former work and pensions secretary Sir Iain Duncan Smith criticized the plan, saying it risks undermining “the greatest pension system in the world” and hitting middle-income earners hardest.
Salary-sacrifice schemes allow workers to reduce their monthly wages in exchange for employer pension contributions, cutting National Insurance liabilities. The system, designed to encourage pension savings, costs the Treasury around £4 billion annually. Reeves is reportedly considering capping the amount that can be sacrificed at £2,000, potentially saving £2 billion, though some reports suggest the Treasury now aims to save £3–4 billion.
Business groups have expressed strong concerns. The Confederation of British Industry (CBI) called the plan “a tax on doing the right thing,” noting that cash-strapped companies may struggle to make up the shortfall. Nearly three-quarters of large firms said they would not cover the gap, according to a CBI poll.
Former pensions ministers have also criticized the proposals. Sir Steve Webb said capping salary sacrifice would harm the very workers the government claims to protect, while Ros Altmann warned it would function as a “stealth tax on employers” due to administrative costs.
The changes echo Gordon Brown’s controversial pensions reforms under the last Labour government. Analysts warn that reduced contributions could lower pension payouts, decrease investment in the economy, and ultimately slow economic growth.
The move comes alongside Reeves’ plan to remove the two-child benefit cap, costing approximately £3.5 billion, after pressure from left-wing MPs. The Chancellor has also confirmed a £550 rise in the state pension next year under the Triple Lock, and plans to freeze rail fares and support families and businesses with energy costs.
