Rachel Reeves Plots Four Billion Pound Clampdown on Pension Perks in Budget Shakeup

Rachel Reeves is preparing a potential £4 billion tax raid targeting generous pension perks, with higher earners and large firms likely to bear the brunt. The Chancellor is expected to scale back the tax breaks enjoyed by staff and employers who pay into workplace pensions through salary sacrifice arrangements, a move that could cost the average worker £210 annually.

Salary sacrifice schemes allow workers to divert part of their salary into pension pots before deductions for income tax or National Insurance, resulting in substantial savings. Employers also benefit from reduced National Insurance payments, since contributions are made prior to tax calculations. This relief currently provides a dual benefit, but Treasury officials have indicated it may soon be curtailed.

The leading option on the table is a cap on the maximum amount savable tax-free—potentially set at £2,000 annually. For workers earning the median UK salary of £35,000 and contributing 5 percent via salary sacrifice, this could translate to an extra £210 National Insurance bill each year, with employers facing a similar £242 increase if they match contributions. For someone on £45,000, the additional annual cost would be £30 for the employee and £34 for the employer if capped at £2,000.

Official data reveals that more than three quarters of income tax relief from salary sacrifice benefits higher-rate taxpayers, with advantages skewed towards larger firms capable of handling the administrative requirements. Reeves has stated that budgetary measures will focus on those with the “broadest shoulders”, as she seeks to raise up to £40 billion to address public finance shortfalls, strengthen the government’s fiscal position, and maintain major social commitments.

Proposals to fully abolish salary sacrifice would generate even greater savings but risk widespread unpopularity, especially as millions—over three million basic-rate taxpayers according to consultants LCP—could be out of pocket. This prospect has sparked warnings from pension experts who say such a move could punish responsible employers and further discourage pension saving at a time when many workers are already under-provisioned for retirement.

Employer reaction may be mixed; some may lower their own contributions or curb pay growth to manage new costs, potentially leaving workers with smaller pension pots. Others warn that a wide-ranging clampdown would represent another blow to business, especially after last year’s record £25 billion National Insurance increase. Critics have called for more modest reforms, highlighting that salary sacrifice has long encouraged better pension provision and suggesting that a carefully designed cap would avoid penalising the average saver while still reining in the cost of tax relief for the highest earners.