Plans by Rachel Reeves to raise up to £2 billion by limiting a tax break on pension contributions could lead to a hiring freeze, experts warned this weekend.
The Chancellor is said to be considering a £2,000-a-year cap on how much salary can be sacrificed into a workplace pension without incurring National Insurance costs. There is currently no limit on the sum an employee can put into a pension under such a scheme before it becomes liable for National Insurance.
The perk is meant to encourage workers to save for retirement. Companies also gain when staff use these schemes as they avoid paying 15 per cent National Insurance on pay that is given up. But a raid on such schemes in next week’s Budget would be ‘another hefty blow to employers’ reeling from last year’s £25 billion hike in their payroll contributions, said Gary Smith at wealth management firm Evelyn Partners.
The move ‘could well drive down pay rises, bonus pools and hiring at larger firms’, he added.
Reeves’ National Insurance raid last year is widely blamed for a sharp rise in unemployment, now at its highest level since late 2020.
A salary sacrifice cap would be smaller in scale than the National Insurance levy, experts said. And firms might first reduce their pension contributions to recoup the extra costs, they added.
Concern: Rachel Reeves is said to be considering a £2,000-a-year cap on how much salary can be sacrificed into a workplace pension without incurring National Insurance costs
But some employers are already sounding the alarm. The Universities and Colleges Employers’ Association has already written to Treasury Minister James Murray urging a rethink. In a letter seen by The Mail on Sunday, chief executive Raj Jethwa said many of his members ‘are now very concerned’ about the prospect of a salary sacrifice ceiling, which could cost the higher education sector at least £50 million a year, or about 800 academic staff.
His figures are based on the Universities Superannuation Scheme, the UK’s largest non-Government pension fund, and do not include pension pot top-ups called additional voluntary contributions.
Salary sacrifice schemes are most widely used in the private sector, where about 30 per cent of workers use the perk.
About one in ten public sector employees also benefit from salary sacrifice tax breaks.
Fears of a raid on pension contributions have risen since the Government ruled out lowering the £268,275 limit for taking tax-free cash from retirement pots.
‘It’s going to add to the damage to the labour market and as a further tax increase on business will damage investment incentives,’ said Anna Leach, chief economist at the Institute of Directors.
A Treasury spokesperson said: ‘We do not comment on speculation around changes to tax outside of fiscal events.’
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