The Budget attack on salary sacrifice schemes threatens private sector pensions while the public sector emerges unscathed, experts warn.
They claim the move could dent savers’ retirement pots and lead companies to cut back on contributions.
The blow came as salary sacrifice contributions – where workers forego wages in return for the money being paid directly into their retirement fund – were capped at £2,000 a year, down from £60,000.
The scheme enables workers to save on tax and National Insurance and boost the amount invested in their pension pots, while employers save on their NI contributions.
Public sector pension schemes with guaranteed retirement income based on a worker’s final salary, or career average earnings, operate under a different system.
The raid will not happen until April 2029 and is predicted to claw back £4.7billion for the Government that year and £2.6billion in the following year.
Stealth tax: Salary sacrifice contributions – where workers forego wages for money paid directly into their retirement fund – were capped at £2,000 a year, down from £60,000
Gary Smith, senior partner at wealth manager Evelyn Partners, said: ‘The tax take is greater than expected and means the impact of this policy on pensions, pay or businesses – or all three – could be severe.
But one thing this salary sacrifice crackdown won’t do is earn the Chancellor a backlash from the public sector, as a raid on tax-free cash would have done.
‘It is politically convenient that public sector schemes do not generally operate on a salary sacrifice basis.’
With civil service and Government-backed schemes unaffected, Mr Smith said it would ‘save this Government another run-in with the unions and vested public sector interests.’
Retirement experts criticised the salary sacrifice cap arriving while Labour is encouraging people to save more for retirement, including setting up a Pensions Commission last summer to tackle under-saving for old age.
Mike Ambery, retirement savings director at Standard Life, says: ‘This change will disproportionately affect private sector workers, as public sector schemes don’t usually use salary sacrifice.
At a time when simplicity and engagement are critical to improving savings levels, adding complexity and reducing incentives risks undermining confidence in the system.’
Salary sacrifice is ‘a cornerstone’ of workplace pensions strategies, helping millions to boost contributions and restricting it will inevitably lead to cutbacks, says Quilter’s head of retirement Jon Greer.
Employers feeling the pain face a double whammy after last year’s increase in employer NI contributions.
Mr Greer said: ‘That’s significant sums stripped from pay packets and business budgets, funds that could otherwise be invested in long-term financial security.’
Family hit by lower cap on retirement contributions
James Sponder earns more than £125,000 working for a tech distribution company – and salary sacrifice was one of the few areas he was not taxed.
That will change with the announcement that the amount employees can shield from NI in these pension schemes will be capped at £2,000.
Mr Sponder, 46, said: ‘I put a lot in because I know I’m improving my overall situation by doing that for when I’m older.
Worse off: James and Daniela Sponder and their children Luca, five, and Alessia, three
‘I’m not going to say I’m worried about paying the bills as a higher earner. But my money is budgeted out each month and we don’t live a lavish lifestyle.
‘The national insurance changes aren’t great, but it would be worse if I had to pay income tax above the cap.’
Mr Sponder and wife Daniela, 38, live in south London with children, Luca, five, and Alessia, three.
Ms Sponder, a part-time office assistant, added: ‘When you look at the real terms value of it and all the expenditure in our bills and putting food on the table in London, once you’re in the tax trap, £100,000 is just not what it says on the tin.’
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