HMRC plans for tax raid on pensions

Telegraph

27-05-2025

Millions of pension savers are at risk of a stealth tax raid under Rachel Reeves after officials launched an inquiry into workplace retirement schemes.
His Majesty's Revenue and Customs (HMRC) is exploring a shake-up of the salary sacrifice systems used by employees at around half of British companies.
The money could be used to plug the black hole in the public finances, estimated at tens of billions of pounds, left by the Chancellor's October Budget and tariffs by Donald Trump.
But the reforms could cost the average earner more than £500 a year in extra income tax and National Insurance, significantly reducing the size of their pension pot.
The National Institute of Economic and Social Research (NIESR) think tank warned on Tuesday that the Chancellor could have to raise taxes by up to £30bn in the autumn Budget to fund benefit giveaways and the rising cost of borrowing.
Labour MPs are calling on the Government to relax its fiscal rules, which say that debt must be projected to fall as a percentage of GDP in five years' time.
They have also called for reversals of Sir Keir Starmer's planned cut in benefits. The Prime Minister has already changed course on planned cuts to the winter fuel allowance, and may also scrap the two-child benefit limit, which would cost £2.5bn a year.
Sir Steve Webb, the former pensions minister, said HMRC's consultation put a potential tax raid 'firmly on the agenda', while Jonathan Watts-Lay, a financial wellbeing specialist, said it would cause people pain either 'now or in retirement'.
The warnings come after it emerged that higher earners were increasingly using salary sacrifice to stuff their pensions and avoid tax 'cliff edges'.
Salary sacrifice allows an employee to voluntarily give up part of their earnings in order to avoid paying income tax and National Insurance on that portion.
The Government is thought to be considering taxes on the wealthy ahead of this year's Budget, when the cost of tax rises last year will be laid bare by the UK's fiscal watchdog.
As many as half of businesses offer a salary sacrifice scheme as a method of making pension contributions, which can provide workers with substantial savings and boost their retirement pots.
The documents, published by HMRC, showed that 51 firms, 41 of which already offered a scheme, were consulted on three possible changes to salary sacrifice.
Under one of the proposals, income tax and National Insurance relief would be removed. Someone earning £35,000 a year and paying 5pc into their pension would lose £560 a year in total, while it would cost their employer £241 more.
A second option proposed removing only National Insurance relief, costing the employee £210 and their employer £241.
In the third option, where National Insurance relief would be removed on any amount sacrificed over £2,000, the report said someone earning £45,000 would lose £30 a year and employers would spend another £34.
Employers viewed each option negatively, with some seeing the removal of both types of relief as a threat to salary sacrifice itself.
They are also likely to be unpopular with the public, after a series of raids on the better-off, including through increases in inheritance tax, capital gains tax and VAT on private school fees.
As a backbencher, Ms Reeves campaigned to reduce all pensions tax relief to a flat rate of 33pc.
Sir Steve, now of consultants LCP, said it was 'very revealing' that HMRC had paid for research into the response of employers.
He said: '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 multibillion-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.'
Mr Watts-Lay, of financial wellbeing and retirement specialists Wealth at Work, said the move was a 'stealth tax'.
He said: 'It would be bad for everyone. Whether they just do National Insurance or National Insurance and income tax, the fundamental of all those scenarios is that [people] have less money going into their pension unless they up their contributions.
'You're basically saying to someone you either need to pay more money, or you carry on and your pot will be smaller when you get to retirement.
'There's no positive impact of it. They either take the pain, or they take the pain when they get to retirement.'
Experts this week warned that Labour's pledge to restore many pensioners' winter fuel payments and review the two-child benefit cap had piled more pressure on the Chancellor to raise more money.
Stephen Millard, of the NIESR, said Ms Reeves could be forced to break a manifesto pledge not to increase income tax, National Insurance or VAT as the amount she was forced to raise hit between £10bn and £30bn.
The number of people earning just under £100,000 is also rising as people look to restrict their earnings with four-day weeks, more holidays and higher pension contributions.
Currently, earning over that amount can lead to someone paying an effective income tax rate of 60pc and losing their entitlement to free childcare.
A Treasury spokesman said: 'These claims are totally speculative. HMRC regularly commissions independent research on all aspects of the tax system.
'We are committed to keeping taxes for working people as low as possible.'