Workers on the UK’s average salary could lose nearly £300 a year with the proposed move.
Rachel Reeves planning stealth tax raid on pension pots (Image: Getty)
Rachel Reeves is set to announce a tax raid on pension schemes for working Brits in the upcoming Budget, it has been reported. The Chancellor is expected to limit the tax-free allowance on pension contributions, which could mean workers on the UK’s average salary will lose up to £300 a year.
The move, which the Chancellor hopes will create £2 billion to help plug the £30 billion black hole, will see workers pay 8% National Insurance on any pension savings above £2,000 a year. With employees generally recommended to contribute around 15% of their salaries to pension pots, Brits on the UK’s average salary of £37,430 would lose out.
If they contributed the recommended amount, their yearly savings of £5,614.50 would be far above the expected threshold, and the remaining £3613.50 would be taxed at 8%, so the employer would lose £289.16 per year.
The 8% rate of National Insurance is expected to be applied to anyone with a salary of less than £50,000, and 2% rate may be applied to any on income above that, reports The Times.
The move has been slammed by businesses, with one firm telling the Government it is trying to “increase their revenues through the back door”, as revealed in research by research by HMRC.
Amid flailing finances, the party has been exploring how to plug the huge financial black hole, with many experts suggesting pensioners would be hit the hardest.
However, Reeves confirmed she would not cut pension lump-sum withdrawals due to concerns about the impact on pensioners, so they can continue to withdraw 25% of a total pension pot up to a maximum of £268,275.
Instead, she will look to save up to £2 billion through this scheme, and Labour is set to break its manifesto by raising income tax, as Reeves confirmed to the budget watchdog this week.
On Monday, the Office for Budget Responsibility will deliver its verdict on the “major measures” in the autumn statement.
Previously, salary sacrifice schemes had no limit before they were subject to National Insurance, and the money was deducted from people’s salaries before it was subject to tax.
Pension experts have warned that employers will be hit the hardest, as companies will also lose the 15% tax-free allowance on their contributions, potentially leading to lower offers.
Steve Webb, partner at pension consultants LCP, told The Times it “hits the very firms who are doing the right thing”.
He warned: “At a time when we need workers and firms to put more focus on pensions, this would be a seriously backward step.”
Steve Hitchiner, chair of the Society of Pension Professionals tax group, added that firms are “unlikely to be able to absorb this cost” and it could be passed onto employees through less generous employer pension contributions or smaller pay rises.
