Tax raid on pensions by HMRC under plans from Rachel Reeves

The Sun

28-05-2025

THOUSANDS of workers could miss out on vital pension cash under plans mooted by Rachel Reeves.
HMRC is exploring a shake-up of the salary sacrifice scheme used by employers which could see staff lose out on up to £560 a year.
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Salary sacrifice allows someone to voluntarily give up part of their salary to put towards benefits like extra workplace pension contributions.
Its major advantage is that it means workers pay less income tax and National Insurance on the portion of their pay that is sacrificed.
However, research paid for by HMRC and published yesterday reveals "hypothetical" plans to reduce the perk.
The fieldwork, carried out under the previous Government between May and August 2023, asked 51 firms to comment on three proposed changes to the way salary sacrifice works.
The first included removing the NI exemption for employers and employees, meaning workers and bosses would have to pay NI on the salary sacrificed.
The second included removing both the NI exemption for employers and employees, and the income tax exemption for employees, on the salary sacrificed.
The third would involve removing the NI exemption but only on salary sacrificed above a £2,000 per year threshold.
If the plans to remove NI relief and income tax relief for a worker on £35,000 a year went forward, it would cost them £560, HMRC estimated.
The second option, proposing to remove only NI relief, would cost the employee £210.
The third option, where NI relief would be removed on any amount sacrificed over £2,000, would see the worker lose out on £30, the report said.
What are the different types of pensions?
Employers consulted as part of the research were most negative about the option involving removing NI and tax income relief on any sacrificed salaries.
Some bosses said this would effectively make the scheme pointless for them to run.
Steve Webb, former pensions minister and partner at LCP pension consultants, said the research commissioned by HMRC suggested a "significant risk" of cuts in the upcoming Autumn Budget.
It comes as the Government looks to fix a multi-billion pound black hole in its finances.
Mr Webb added: "It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back.
"Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today.
"With a Chancellor reportedly looking to make up a multi-billion pound hole in the public finances in her Autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure."
The Sun asked HMRC and the Treasury to comment.
What is National Insurance?
NATIONAL Insurance is a tax on your earnings, or profits if you're self-employed.
These contributions make you eligible for things like the state pension and certain benefits.
You'll usually pay National Insurance Contributions (NICs) when you're over the age of 16 and earning a certain amount.
For example, if you earn £1,000 a week, you pay nothing on the first £242.
Earn over that and you pay 10% on the next £725 - so £72.50. Then you pay 2%o on the rest, so £33, which works out as 66p.
For the self-employed rates are slightly different.
You can also get something known as National Insurance in some circumstances when you're not working, for example when you have kids and claim certain benefits.
NICs are usually taken automatically by your employer and paid to HMRC, so you don't need to do anything.
You can see how much NICs you pay on your wage slip.
Anyone working for themselves usually has to pay NICs themselves when completing a self-assessment tax return.
What is salary sacrifice?
Salary sacrifice lets you give up a portion of your salary in exchange for a higher pension contribution from your employer.
Your overall gross salary may go down but your take home pay may not as the process means you pay less National Insurance and income tax on your earnings.
Your employer has to fork out less on National Insurance too, and may pass on some or all of the savings to you.
Clare Moffat, pensions and tax expert from Royal London, previously gave an example of someone earning £35,000 and whose bosses share 50% of their National Insurance saving with their employees.
Without using salary sacrifice, the employee would see £2,450 go into their pension each year.
However, with salary sacrifice, they would see £3,129 go in each year instead - £679 more - with their take home pay remaining at £27,320.
It can be not just an immediate financial boon, but a major one for later life.