Chancellor plans significant pension tax changes
Chancellor Rachel Reeves is reportedly planning a £370 a year pay cut for workers through a “stealth tax raid” on retirement savings, reports BritPanorama.
This proposal comes despite Labour’s manifesto pledge to keep income tax rates unchanged. Reeves has indicated a move to limit a tax break on pension contributions for both employers and employees, aiming to generate up to £2 billion annually.
Concerns have emerged that this proposed targeting pensions could severely impact company pension schemes. Rather than focusing on lump-sum withdrawals, her strategy appears aimed at salary sacrifice schemes as a means to address shortfalls in public finances.
Currently, there is no cap on employee contributions to their pension under salary sacrifice schemes before National Insurance contributions apply. However, the Chancellor is expected to announce a £2,000 cap on tax-free contributions, meaning amounts exceeding this threshold would incur the standard National Insurance rate.
Reeves is due to deliver her budget plans to the House on November 26. The proposal has drawn scrutiny, particularly from Deputy Labour Party leader Lucy Powell, who previously cautioned that violating the party’s pledge could undermine public trust.
Financial experts have warned that companies may lose the tax exemption that allows them to avoid standard employer National Insurance contributions on funds they allocate towards employee pensions. This shift could result in significant costs for businesses, particularly those aiming to provide competitive retirement benefits.
Steve Webb, of pension consultants LCP, highlighted the potential drawbacks: “Introducing a cap would increase National Insurance bills mostly for employers and hits the very firms who are doing the right thing.” He emphasized that the move could set a precedent that threatens the viability of salary sacrifice schemes.
In her discussions with the Office for Budget Responsibility (OBR), Reeves signaled an increase in personal taxation as part of her upcoming announcements, which are intended to stimulate economic growth. However, if income tax rises occur, it would contradict Labour’s commitment not to increase these rates.
While her proposals are not yet finalized, they reflect urgent efforts to resolve pressing financial challenges, drawing critical attention to how these measures will affect both workers and companies.
Chancellor Reeves faces a complex landscape as she scrambles to balance fiscal responsibilities with public trust and party integrity.
