Rachel Reeves, the Labour Party Chancellor, has announced a significant change affecting nearly three million workers with a new £2,000 cap on pension contributions made through salary sacrifice schemes. Set to come into effect in 2029, this move is forecasted to reduce retirement savings for many, particularly those earning between £50,271 and £125,140.
HM Revenue and Customs (HMRC) estimates that around 2.2 million higher-rate taxpayers will limit their pension contributions due to the new restrictions. The Treasury justifies the reform by stating that previously, higher earners were able to contribute large sums to their pensions without paying any tax, effectively creating a costly tax advantage. The government projects that this adjustment will generate an additional £4 billion in revenue.
Sir Steve Webb, former pensions minister, criticized the policy, warning that it could have far-reaching negative effects on pension saving. He highlighted the contradiction of the government’s broader push to encourage pension savings while simultaneously implementing measures that might lead to millions cutting back their contributions. Notably, about 25% of those affected are basic rate taxpayers, underlining that the impact isn’t confined to higher-rate earners alone.
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A Treasury spokesperson responded by emphasizing the fairness of the reforms, noting that 95% of workers earning under £30,000 who use salary sacrifice will remain unaffected. The changes aim to curb a taxpayer-funded advantage that disproportionately benefited the wealthiest, while protecting the majority of lower and middle-income earners. Additionally, analysis indicates that over three-quarters of workers under the age of 30 will remain unaffected by the new rules.