What is the salary sacrifice scheme and why is it in Reeves' sights?
View original at uk.finance.yahoo.comWhat is the salary sacrifice scheme and why is it in Reeves' sights? Chancellor Rachel Reeves is reportedly plotting to reduce the amount of money people can sacrifice from their pay cheques to put in their pension pots without paying national insurance (NI)…
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The change could raise between £3bn and £4bn annually
80% confidenceIf employer reduced contribution by 1%, that pot would fall to £198,486, a drop of almost £25,000
80% confidenceThe existing structure disproportionately benefits higher earners and those in formal employment, while the self-employed and many lower-income workers lack access to similar reliefs
80% confidenceRestricting salary sacrifice on pension contributions could cause long-term damage to people's retirement prospects
80% confidenceOnly 13% of surveyed employers said they would top up contributions to compensate
80% confidenceIn the Nest scheme, nearly half of large employers contribute above the statutory minimum rate of 3%, with over 14% covering the full minimum contribution of 8%
80% confidenceAny change to salary sacrifice would inject uncertainty into a system that needs long-term trust, not sudden shocks
80% confidenceOnly 43% of households are on track to achieve an adequate retirement income
80% confidenceLimiting salary sacrifice will hit working people trying to save for a better pension in retirement, including those on lower-than-average earnings
80% confidenceAn employee earning £105,000 and sacrificing £10,000 could face an extra £160 a year in NI, with their employer paying about £1,200 more under a £2,000 cap
80% confidenceA 22-year-old man on the median income of £37,382, contributing a combined 9% each year, would retire at 68 with a pension pot of £223,297
80% confidenceMany companies would struggle to absorb the added cost if the chancellor were to curtail salary sacrifice or impose NI above a new threshold
80% confidenceCapping salary sacrifice risks discouraging saving and piles further pressure on businesses and payroll systems
80% confidenceFor a higher-rate taxpayer aged 22 earning between £50,000 and £60,000, if employer contribution fell from 6% to 3%, the projected pot would decline from £438,048 to £318,580, a loss of nearly £120,000
80% confidenceA worker on £120,000 sacrificing £20,000 could see a £360 rise in NI, while their employer might pay roughly £2,700 more
80% confidenceIf salary sacrifice was removed, it's inevitable that lower-earning workers currently benefiting from these arrangements would experience less employer generosity and higher deductions from their pay
80% confidenceThe pension system relies on stability and predictability
80% confidenceEmployees could become less likely to increase pension contributions beyond auto-enrolment minimums
80% confidence74% of surveyed employers said they would not increase employer contributions to offset employees' lost pension savings from higher NI charges
80% confidenceToo many people are nearing retirement without adequate savings
80% confidence