According to Financial Times News, Chancellor Rachel Reeves is considering capping pension salary sacrifice benefits at just £2,000 annually, above which normal National Insurance rates would apply. The government estimates this would raise £2 billion in revenue, targeting the current £4.1 billion in lost NI payments from these schemes. For someone earning £125,000 and saving £25,000 into their pension, this could mean an extra £460 annually in NI costs for the employee and £3,450 for their employer. The policy isn’t finalized yet and might also affect other salary sacrifice benefits like childcare and cycle-to-work schemes. Business and pension experts are warning this move could backfire by discouraging retirement savings when people already aren’t saving enough.
The employer response nobody wants
Here’s the thing – when you make something more expensive for businesses, they tend to do less of it. Robert Salter from Blick Rothenburg put it bluntly: this policy “stores up problems for governments down the line, it’s incredibly short term.” Basically, employers facing a new 15% NI charge on pension contributions above £2,000 might just lower their contributions to offset the cost. And we’re not talking about small numbers here – a survey found 77% of firms offer these schemes, though only 20% pass on all the NI savings to employees.
Beyond just pensions
This isn’t just about retirement savings. An anonymous business representative called it “another increase in national insurance” that could lead to companies lowering headcounts and investing less. Think about it – if companies are suddenly facing thousands in extra NI costs for high earners, that money has to come from somewhere. Maybe pay rises get smaller. Maybe bonus pools shrink. Or hiring slows down. The pension manager quoted in the article laid it out pretty clearly – this could ripple through the entire business.
The government’s confusing priorities
Now here’s where it gets really interesting. The government just set up a pensions commission to address the “massive” problem of shrinking pension incomes. They’re also trying to direct more retirement funds into the UK economy through a voluntary agreement with pension providers. But this policy seems to work directly against both goals. Yvonne Braun from the Association of British Insurers nailed it – these proposals “prioritise short-term revenue raising over long-term economic resilience.” So which is it? Do they want more pension savings or not?
The elephant in the room
And let’s talk about the public sector versus private sector divide. The Institute for Fiscal Studies found that average employer pension contributions are three times higher in the public sector (18%) than private sector (6%). Tina McKenzie from the Federation of Small Businesses pointed out the obvious – “the public will not take it well if those on gold-plated public sector pensions pull the rug under the taxpayers ultimately paying their wages.” That’s a political time bomb waiting to go off. The government seems to be hitting private sector retirement savings while public sector pensions remain untouched.
