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Around 3.3 million retirement savers in the UK are likely to face higher National Insurance charges on pension salary sacrifice from 2029, pointing to the impact of Rachel Reeves’ action on the tax benefits of the schemes.
More than 40 per cent of the 7.7 million people paying into salary sacrifice pension schemes currently see their pay, including bonuses, cut by more than £2,000 a year, according to figures published by HM Revenue & Customs.
In his Budget last week, the Chancellor announced that salary-sacrificing pension contributions above the annual £2,000 limit will no longer be exempt from National Insurance, warning that the current system is “not sustainable for our public finances”.
In guidance published late on Thursday, HMRC said it expected the measure to affect 290,000 employers operating salary sacrifice arrangements, which allow workers to give up some of their main salary and convert the excess into higher pension contributions.
The tax authority has estimated a one-off cost of £20mn for businesses and a further £30mn per year to administer the changes, with HMRC’s own system expecting the cost of the changes to be “in the region of £1.9mn”.
According to government estimates, the crackdown on pension salary sacrifice schemes – which was a key part of Reeves’s £26bn tax-raising budget – will generate £4.7bn for the Treasury in 2029-30.
Revenues next year are expected to fall to £2.6 billion as some higher and additional rate taxpayers are expected to change their pension arrangements and claim tax relief above the basic rate through self-assessment tax returns in the year after the new rules come into effect.
The policy change was criticized by pensions industry bodies, which warned it would increase the burden on businesses and ultimately lead to savers cutting their pension contributions, despite ministers trying to encourage people to put more money towards retirement.
Sir Steve Webb, a former pensions minister and now partner at consultancy LCP, said the action would affect “about three in seven workers who use salary sacrifice to pay their pension”.
“At a time when there is a serious problem of ‘under-saving’ across the country, this change will make matters worse,” he said.
Most other types of salary sacrifice schemes closed in 2017, due to government pressure to increase revenue.
HMRC said the cost of keeping National Insurance relief for salary-sacrificing pension contributions is set to rise from £2.8 billion in 2016-17 to £5.8 billion in 2023-24, the latest year for which data is available.
Without the changes, the bill would “almost triple to £8bn by the tax year 2030-31”, HMRC said.
Employees who currently choose salary sacrifice to receive means-tested benefits such as tax-free childcare – which is lost if a parent’s net-adjusted salary rises above £100,000 – will still be able to do so from April 2029. But they will not get National Insurance relief on contributions over £2,000.
Simon Bocca, founder of payroll company PayCaptain, said the measures would be detrimental to retirement savings, especially for women.
“For women who already have smaller pension pots and interrupted careers, it will be harder and more expensive to close the gap, deepening the gender pension gap,” she said.
