The government will put a cap on salary sacrifice on pensions to save around £4.7bn, it was revealed ahead of today’s Budget by the Office of Budget Responsibility, which mistakenly published its post-Budget ‘Economic and fiscal outlook’ document this morning.
The OBR said: “We apologise for this technical error and have initiated an investigation into how this happened.”
The leak revealed that in the Budget the amount of salary that workers can sacrifice into workplace pensions will be capped at £2,000 a year from April 2029.
The news prompted dismay among pension professionals.
Gary Smith, senior partner and retirement specialist at wealth management firm Evelyn Partners, said: "This cap throws a spanner into the works of private sector pensions, where salary sacrifice is a crucial and valued feature of workplace schemes. At £4.7billion, the tax take is greater than expected and means the impact of this policy on pensions, pay or businesses – or all three – could be severe."
He said that research earlier this year suggested that about 48% of all UK private sector companies offer salary sacrifice pension contribution systems, but at larger firms it was about 67%, and up to 85% for biggest employers.
Mr Smith added: "Restricting salary sacrifice is a tax penalty on people trying to the right thing by saving efficiently for their own retirement and it’s yet another National Insurance cost increase imposed on firms, which may result in reduced pay and pension benefits for private sector employees. Some employers who currently pay more than the auto-enrolment minimum on behalf of their employees will be inclined to reduce their contribution rates or other employee benefits to adjust for these changes."
Steve Hitchiner, chair of the Tax Group at the Society of Pensions Professionals (SPP) said: “Restricting salary sacrifice for pensions will affect the take home pay of millions of employees – especially basic rate taxpayers – and is a tax on working people, in spirit if not in name. It is also another sizeable cost to employers and, perhaps most importantly its restriction will reduce pension saving.”
Salary sacrifice for pensions is also known as salary exchange. It is an optional arrangement where an employee gives up a portion of their salary in return for their employer paying an equivalent amount into their pension.
Although salary is sacrificed by the employee, it is treated as employer pension contributions for income tax and National Insurance purposes. Around a third of private sector employees make use of salary sacrifice arrangements, and almost 10% of public sector workers do so too.
Recent research published by HMRC demonstrated that employers are generally very supportive of the arrangement and believe that any changes would cause confusion, reduce benefits to employees, and disincentivise pension savings.
The Treasury said further guidance will be published before April 2029.
