A week or so after the Budget and I am still grappling with one of the most baffling and possibly vindictive moves I’ve ever seen in a Budget - the attack on pension savers using salary sacrifice.

According to the latest estimates, based on government data, some 3.3m people using salary sacrifice to boost their pensions will be hit by the £2,000 Budget cap on salary sacrifice.

They will simply save less into their pension.

Just to recap, the Treasury plans to impose National Insurance Contributions on sacrificed salary used for pensions in excess of £2,000 per year from 2029.

Chancellor Reeves says the move will save £4.7bn a year, eventually. Of course, it will probably save nothing like that as people will find other avenues for the money and avoid NI penalties.

Former Pensions Minister and LCP consultancy partner Steve Webb has criticised the salary sacrifice change and warns that hitting people at a time of chronic pension under-saving will “make matters worse.” He's right.

According to the government assessment, around 7.7m workers are currently using salary sacrifice for pensions, approximately 1 in 5 of the workforce. Of the 7.7m about 3.3m (around 42%) currently sacrifice more than the £2,000 limit and will be crocked by the cap. 

On this basis, three in seven workers using salary sacrifice will be hit.

Salary sacrifice, once a little known technique a decade or so ago, has become a major opportunity to boost pension saving and is used by many professionals and better paid workers, millions in fact.

Companies have embraced it too as it means savings on National Insurance. It’s a bit of a win-win for employees and employers. But it’s not a scam or a tax dodge as some see it. It’s a perfectly legitimate way to save more into a pension.

At a time when many see the UK as hugely under-saving in terms of pensions it is one of the few bright spots and has encouraged more people to save more into their pensions which benefits both them and wider society as they are less likely to be a drain on the public purse when they retire.

So why clamp down on it? Isn’t boosting pension saving what we all want to see? 

Apparently not if you are the Treasury. It’s simply a dumb and vindictive move and I choose my words carefully. It will save the Treasury money in the short term at the cost of many pensioners, the ones who could save more, being poorer off in retirement.

I can understand the desire of the Treasury to protect NI revenues but why attack a successful scheme which has encouraged millions more to save into their pensions?

The Finance Bill just been published and we’re promised a review of the plans surrounding salary sacrifice so there is still time to review the changes, as the Treasury should.

The Treasury may argue that it is not killing off salary sacrifice, just scaling back its advantages. That may be an argument but it is not one that will do anything to halt the damage to salary sacrifice and reduce its advantages.

We already have one of the worst State Pensions in Europe and the Treasury now seems bent on reducing the living standards of retirees who opt to use salary sacrifice.

There is still time to think again Ms Reeves on this one and I urge you to do so.

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Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days.  Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Follow @FPT_Kevin 

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