UPDATE: New reports confirm that UK Chancellor Rachel Reeves is planning to target pension pots by restricting salary sacrifice schemes, a move that could generate £2 billion annually. This potential shift has raised immediate concerns among both employees and employers about its impact on retirement savings.
Sources indicate that Reeves is considering limiting tax breaks for pension contributions made by employers and employees. Currently, individuals can contribute up to £60,000 to their pensions annually without incurring income tax. However, proposed changes could cap salary sacrifices at just £2,000, leading to increased costs for workers. For instance, a taxpayer earning £50,270 who contributes 6% of their salary could see their annual national insurance payments rise by £80, while contributing £5,000 could mean an additional £240 in yearly taxes.
Experts warn that such changes may disproportionately affect firms that are actively encouraging pension savings. Steve Webb, a partner at pension consultants LCP, stated:
“Introducing a cap would increase national insurance bills mostly for employers and hits the very firms who are doing the right thing.”
He further highlighted that this could lead to expectations of further reductions in pension benefits.
This announcement comes amid growing tensions within the Labour Party regarding tax policies. Labour peer Thangam Debbonaire expressed confusion over the party’s commitment not to raise income tax, suggesting an internal debate over the necessity of such promises. She stated, “I’m not quite sure why we felt we had to make that commitment in the General Election at the point that we did.”
As speculation mounts, reports indicate that Reeves is contemplating a 2p increase in income tax, the first such rise in 50 years, during the upcoming Budget scheduled for November 26, 2025. This proposal aims to address a staggering fiscal gap of £30 billion identified by the Office for Budget Responsibility (OBR).
The Chancellor’s potential tax hike is seen as an attempt to ensure that not only workers but also pensioners and landlords contribute fairly to the economy. However, it remains unclear how this will affect public trust in the Labour Party, especially as Cabinet minister Steve Reed downplayed concerns, insisting that the party is committed to delivering on its manifesto promises.
With these significant developments, stakeholders are urged to stay informed about the implications of Reeves’ proposed policies on both pensions and overall taxation. As the situation evolves, the Labour Party’s strategy regarding taxation and public finances will be critical to watch in the coming weeks.
The Treasury has been contacted for comments regarding these urgent developments.
