Rachel Reeves Plans Pension Tax Change in Budget to Raise Billions

Chancellor Rachel Reeves is set to announce a change to tax breaks on pension contributions in the upcoming budget, a move expected to generate up to £2 billion annually for the public finances.

The plan, revealed today, would cap the amount of salary an individual can contribute to their pension under salary sacrifice schemes without incurring National Insurance payments at £2,000 per year. Contributions exceeding this limit would be subject to the full rate of National Insurance – 8% for those earning under £50,000 and 2% for higher earners. Experts warn this could reduce take-home pay and diminish the size of pension pots, potentially impacting retirement security for millions. This comes as the government faces a significant fiscal gap, requiring difficult decisions on spending and taxation.

While Reeves has opted not to alter pension lump-sum withdrawals, allowing retirees to continue accessing 25% of their pension pot tax-free up to £268,275, the shift towards targeting salary sacrifice has raised concerns. 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.” The change is also expected to impact employers, who currently benefit from a National Insurance exemption on pension contributions made through these schemes. For more information on pension planning, visit the MoneyHelper website.

Lucy Powell, Labour’s deputy leader, cautioned Reeves against breaching the party’s manifesto pledge not to raise income tax, warning it would erode public trust. The Office for Budget Responsibility will assess the impact of these “major measures” on Monday. The Treasury is particularly concerned about ensuring the OBR’s forecast accurately reflects the impact of growth measures alongside the need for tax increases. You can learn more about the UK’s economic outlook from the Office for National Statistics.

Officials stated that the Chancellor intends to proceed with the changes, believing they represent a necessary step to address the nation’s financial challenges.