Chancellor Rachel Reeves could significantly weaken a pensions perk which lets workers ‘double their money’ tax-free.
Financial experts fear a tax raid on workplace salary sacrifice schemes and private pension relief rates could be on the cards in this year’s Autumn Budget as Ms Reeves looks to claw back cash for the public purse after welfare reform u-turns and the row-back on Winter Fuel Payments.
While Labour promised not to raise income tax, National Insurance or VAT ‘for working people’, hints have been dropped by ministers that other schemes could be under the knife this year, including pension tax relief and salary sacrifice arrangements.
As reported by experts Brunsdon Financial: “Reports indicate that officials are now reviewing proposals for a flat 30% rate of pensions tax relief, a policy previously supported by Rachel Reeves in 2016 as a backbencher. If implemented, this could generate up to £2.7 billion in revenue – while redistributing some advantage away from higher earners.”
This would be bad news for higher earners especially, who can make use of salary sacrifice rules as they currently exist to save as much as 40-45% on their tax by hiding the money in their pension, a system Martin Lewis says can ‘double your money’ when combined with other pension perks.
Martin Lewis said in the last series of his ITV show: “The most important thing to remember is the money you put into your pension is from pre-tax salary. So this is the superpower. You get tax relief. So as a basic 20% rate taxpayer, you’re putting £100 in, but of course when you get it in your pay packet 20% is being taken off. So to put £100 in only costs you £80. So you’re getting £100 investment for the cost of £80.”
For those in a workplace pension scheme, you will automatically be enrolled in a pension in most cases. As a result, your employer must match your contributions to a certain level.
This is important because, in most cases, for every £100 you put in, your employer will add in matched contributions.
Martin continued: “So for a basic rate taxpayer, that means you, if you’re putting in £80, you’re getting £160, double the money going into your investment, double your money from what’s coming out your pay packet.
“If you’re a higher rate taxpayer, £60 becomes £160, if you’re a top rate taxpayer – and some people might say it’s unjust they’re the ones that get the biggest but anyway – £55 is nearly being trebled to £160 going into your investments.
“That is just completely unbeatable. So in a way if you were not to do it, you’re giving up a payrise.”
But now there are worries that these ‘unbeatable’ perks could be softened, with 40-45% relief dropping down to 30%, meaning less benefit for higher earners.
“Many clients are already asking what a potential change in pensions tax relief might mean for their long-term plans,” says Brian Morman, Director at Brunsdon Financial. “While no official reforms have yet been announced, it’s a good time to review your pension strategy and make sure it remains tax-efficient.”
Brunsdon adds: “Another area under scrutiny is salary sacrifice – a commonly used mechanism that can allow employees to exchange part of their salary for pension contributions or other benefits, reducing their overall tax liability. Treasury officials are reportedly reviewing this amid concerns that it disproportionately benefits higher earners.”
