Any salary sacrifice clampdown ‘would hit pension savers, firms and economy’

Charlene Young, senior pensions and savings expert at AJ Bell, said: “Thousands of employers currently use pensions salary sacrifice as a way of efficiently paying pension contributions while cutting National Insurance costs for them and their employees.

“The dual tax and NI advantages mean pension salary sacrifice has frequently come under scrutiny, as the government searches for opportunities to reduce tax reliefs and boost revenue without explicitly raising rates.

“Reports indicate that reform of salary sacrifice pension schemes could be one of the ways Reeves chooses to dance around Labour’s manifesto promises to boost the public finances.

“Rather than an all-out ban on using salary sacrifice, one option on the table is a £2,000 cap on the amount of earnings that can be exchanged for pension contributions that benefit from a National Insurance exemption.

“Introducing the cap could reportedly raise up to £2 billion a year, but it reduces take home pay for pensions savers and runs the risk of them having less in their pension pots at retirement.

“Our analysis shows that someone aged 35 earning £50,000 a year could face a hole in their pension of £22,060 by age 65 under these plans.

“This assumes they already have a pension fund of £30,000 and save an overall contribution of 5 per cent personally, with another 3 per cent coming from their employer.

“The black hole rises to over £37,000 or even nearly £50,000 if they are already a higher earner on £75,000 or £100,000 respectively.

“Any changes would be seen as another attack on employers. HMRC-commissioned research earlier this year presented employers with different scenarios for reforming pensions salary sacrifice.

“Employers reacted negatively to all of them, saying that removing reliefs would wipe away the financial benefits of salary sacrifice, and lead to lower pension savings and workers’ morale.

“Any potential changes to pensions salary sacrifice should not only take account of the immediate impact, but also consider what it means for the future of pension savings and Brits’ retirement income.

“Given the significance of this issue, it makes sense to leave such a major decision until the Pensions Commission has concluded its work.”