Industry reaction to the Budget has revealed widespread concern over the proposed salary sacrifice changes, which have been branded a "tax on working people, in spirit if not in name".

Forecasting from the OBR revealed that the Chancellor Rachel Reeves is announcing a cap on salary sacrifice pensions, as well as an extension to the freeze on income tax allowances.

However, Society of Pensions Professionals tax group chair, Steve Hitchiner, warned that "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 removal will reduce pension saving," he warned.

These concerns were echoed by Evelyn Partners senior partner and retirement specialist, Gary Smith, who said that the cap on salary sacrifice "throws a spanner into the works of private sector pensions, where salary sacrifice is a crucial and valued feature of workplace schemes".

He also repeated recent industry concerns that the changes fly in the face of the work of the Pensions Commission, warning that "this is a shot in the foot of that project, as it can only discourage workplace saving".

"And it will certainly be a blow for those who are using salary sacrifice to avoid punitive marginal tax rate steps like that at £100k, and people with variable pay like bonuses who often opt to sacrifice these in lieu of a highly tax efficient pension contribution," he continued.

Mercer UK wealth strategy leader, Tess Page, agreed, suggesting that "at a time when the UK savings gap is growing, restricting pension salary sacrifice schemes is likely to reduce employees’ pension pots and weaken their financial security in later life".  

"Additionally, the timescale for implementation will create further uncertainty," she warned.  
“Employers would face increased National Insurance costs and greater administrative burdens, making it more challenging to offer competitive pension benefits and potentially hinder the ability to attract and retain talent, and reduce workforce morale and productivity.

“The government should carefully consider the long-term individual and societal consequences of these changes, especially in the context of the ongoing Pensions Commission."

And the government has pushed ahead with the changes to salary sacrifice despite repeated warnings from the industry, with Independent Governance Group head of policy and external affairs, Lou Davey, pointing out that "the clear message from industry ahead of the Budget was to give us stability to not risk undermining saver confidence".

"The government has a clear desire for the pensions sector to help drive growth, but this move is counterintuitive by limiting the ability of pension funds to invest in UK assets and encouraging savers to make decisions they might regret in retirement," Davey stated.

The news that the income tax threshold freeze has been extended beyond 2028 has also prompted concerns, as Davey warned that extending the freeze on income tax thresholds will have a significant impact on working savers and their pension pots.

"With take-home pay effectively reducing, people will be looking for efficiencies in their own budgets, and the contributions they make to their own pensions are a likely victim of this change," she warned.

Broadstone head of personal financial planning, Rob Hillock, agreed, warning that while the renewed freeze on personal allowances will drive significant tax revenues for the Chancellor, it will ultimately see even more workers – and indeed pensioners – tip into the tax system or onto higher rates.

“This is a significant stealth tax on households and places additional strain on working families already facing higher living costs. The quiet expansion of the tax base will feel increasingly painful for households under pressure," he stated.


 

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