Chancellor Rachel Reeves is reportedly planning to cap the amount of salary individuals can contribute to their pensions through salary sacrifice schemes without incurring National Insurance (NI) payments at £2,000 annually. This move is expected to raise up to £2 billion a year for the government.
Currently, there is no limit on salary sacrifice contributions, which allows employees to reduce their taxable income and their employer's NI contributions. Experts warn that introducing a cap could lead to employers, including those in the public sector, facing higher NI payments.
This increase in employer costs could ultimately be borne by taxpayers through reduced public services or higher taxes, as public sector pensions are primarily funded by the government. While salary sacrifice is less common in the public sector, about 10% of public sector workers utilize these schemes.
If public sector workers are exempt from the cap, their schemes could become more attractive compared to private sector pensions, potentially exacerbating inequality. Conversely, if the cap applies to public sector schemes, the government might have to cover shortfalls in employee contributions, leading to unexpected costs for the Treasury. Alternatively, public sector employees might face reduced take-home pay if they have to pay extra NI on their contributions, making pension top-ups less appealing.
Financial planners suggest that the government could inadvertently increase its own tax burden on public sector pensions. Depending on the implementation, either public s... download the app to read more
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