Salary sacrifice schemes: chancellor reportedly plotting new pension raid

Rachel Reeves is thought to be targeting workplace pensions in a move that could cost the average worker over £500 a year in additional tax.

Employees could face a raid on their workplace pension schemes by the Government. 

Chancellor Rachel Reeves has launched an inquiry into workplace pensions and is thought to be targeting the salary sacrifice schemes used by staff at an estimated 50% of UK businesses, according to the Telegraph newspaper. 

It comes just months after the chancellor unveiled plans to make pensions liable for Inheritance Tax from 2027, as the Government searches for more ways to raise revenues in a bid to shore up its finances.

Here's a more detailed look at what the Government is reportedly considering changing.

Using salary sacrifice to reduce tax bills

The Government has this week published a research report commissioned by HMRC entitled “Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions”. 

Commissioned by the previous Government, the research tests employer reactions to three hypothetical scenarios in which salary sacrifice is reduced. 

The study took place from May to August 2023 and involved interviews with 51 firms, 41 of which offered salary sacrifice and 10 of which did not. 

In salary sacrifice schemes, staff choose not to receive a certain portion of their income in exchange for non-cash benefits, such as pension contributions.

By doing so, both parties also reduce their liability for National Insurance and taxation. 

Three salary sacrifice scenarios tested

The three scenarios included removing the National Insurance (NI) exemption for employers and employees, resulting in employer and employee NI charges on the salary sacrificed by the employee; axing the NI exemption for employers and employees, and the Income Tax exemption for employees, on the salary sacrificed; and axing the NI exemption but only on salary sacrificed above a £2,000 per year threshold.

According to LCP, a pensions advisory firm, employers’ least preferred scenario was the second option, in which both NI and tax breaks for salary sacrifice were scrapped. 

Some employers said that this would negate the benefit of operating salary sacrifice schemes.  

Most preferred the scenario where salary sacrifice was capped but allowed for smaller amounts of sacrificed salary.

However, the changes could cost the average worker over £500 a year in additional Income Tax and National Insurance, reducing the size of their pension nest egg.

It’s thought the cash will be used to fill the black hole in the Government’s finances. 

Source: HMRC/Telegraph

Chancellor could hike taxes by up to £30 billion

The National Institute of Economic and Social Research (NIESR), a think tank, warned this week that the Chancellor could have to hike taxes by between £10 billion and £30 billion in the autumn Budget to cover the increased cost of borrowing and recent U-turns on benefit cuts. 

“It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back,” said Steve Webb, partner at LCP and former pensions minister. 

“Although the research was commissioned under the previous Government, the desire to raise additional revenue is, if anything, even more acute today. 

“With a Chancellor reportedly looking to make up a multi-billion pound hole in the public finances in her Autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure.”

Meanwhile, a Treasury spokesperson told the Telegraph the claims were "totally speculative." 

"HMRC regularly commissions independent research on all aspects of the tax system," they said. 

”We are committed to keeping taxes for working people as low as possible.”