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Millions more workers than previously thought are set to be hit by Rachel Reeves’ plan to cap the tax benefits of salary sacrifice pension schemes as companies are likely to lower wages, according to analysis by the UK fiscal watchdog.
HM Revenue & Customs said in December that 4.3mn of a total of 7.7mn people using the schemes were “fully protected” because national insurance will apply only to pension contributions above £2,000 a year, under measures set out by the chancellor in last year’s Budget. The tax authority said 3.3mn retirement savers contributed above this level.
But analysis published by the Office for Budget Responsibility on Thursday showed that employers could formalise salary sacrifice arrangements by lowering wages and increasing pension contributions across the whole workforce, while others could put all of their employees into schemes without salary sacrifice benefits.
Employers would pass on 76 per cent of the costs of the salary sacrifice changes to their employees in the form of lower wages, according to OBR estimates.
The watchdog cautioned that “the behavioural response to the measure is highly uncertain” and did not give a precise figure for how many people would be affected.
Sir Steve Webb, former pensions minister and now a partner at consultancy LCP, said the OBR analysis showed “very clearly that there are a range of ways in which employers will respond, which will affect the wider workforce and not just those contributing over £2,000 via salary sacrifice”.
“Far from ordinary workers being ‘protected’ from the changes, we could see millions of people on modest incomes losing out as well, further undermining their incentive to save in a pension,” added Webb, who asked the OBR to carry out the extra analysis.
The Treasury said its costings had always taken into account employer reactions. “Our reforms protect 95 per cent of workers earning under £30,000 who use salary sacrifice, while tackling costs that were set to treble to £8bn as high earners piled in bonuses tax free,” it added.
From April 2029, salary-sacrificed pension contributions above £2,000 will be subject to National Insurance at normal rates — 15 per cent for employers and 8 per cent on staff with earnings less than £50,270, and 2 per cent on income above that.
In forecasts produced for Reeves’ Budget in November, the watchdog estimated that the crackdown would yield £4.7bn for the Treasury in 2029-30, forming a key part of the overall £26bn increase in taxes.
The OBR’s latest analysis revealed that this figure includes an estimate that lower wages and profits will reduce the yield of the policy by £700mn.
The watchdog said employers might opt to reduce future pay growth and increase their contribution to pensions, which are not affected by the change, instead.
But “the employer must take an ‘across the workforce’ approach to increased generosity of employer contributions and a proportionate reduction in pay”, it added, rather than singling out those affected.
The planned changes to salary sacrifice have been widely criticised by pension industry bodies since they were announced in November.
The sector has warned that the crackdown will add to the cost burden on businesses and ultimately lead savers to cut their pension contributions, just as ministers seek to encourage Britons to put away more money for retirement.