Please Rachel, don’t sacrifice workers’ pensions

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Salary sacrifice schemes are highly likely to be dismembered on the chancellor’s tax-raising altar come November’s Budget, and for one very simple reason: ignorance.

The average worker has a very limited grasp of this valuable pensions boosting perk, or how costly its removal could ultimately be for their future retirement prospects.

Let’s say, for instance, that on Budget day, Rachel Reeves took the axe to tax-free lump sums or the triple lock on state pension payments. There would be blood-curdling screams from older voters, who well understand their value. Paying more tax on pension savings they have already accumulated, or receiving a smaller increase to their state pension next April is a cost they can immediately quantify.

However, it’s much easier to diddle millions of younger workers who stand to get a raw deal on their future pension savings. The impact of having less money flowing into retirement savings for the rest of their working lives is harder to fathom — especially if retirement is a distant prospect. But if she scraps or caps salary sacrifice, millions of working people will face a poorer retirement, an effective pay cut, plus higher tax bills — and it’s not just higher earners who will be hit.

How? Salary sacrifice is a tax break that incentivises employers — and employees — to make additional retirement savings, as national insurance is not applied to pension contributions. This offers big savings for employers, who would otherwise pay 15 per cent national insurance contributions (NICs). As a result, many private sector companies make much more generous staff pension contributions than the legal minimum (a very stingy 3 per cent of salary).

If salary sacrifice was capped at £2,000 a year, as is hotly rumoured, a worker earning £125,000 and sacrificing £25,000 into their pension would pay £460 more in NICs. However, their employer would be clobbered for an extra £3,450 — more than seven times as much — according to calculations by RSM, the accountancy firm.

This will make employing people even more expensive. So how will employers — still reeling from NIC increases at the last Budget — recoup this cost?

The obvious answer is by making less generous staff pension contributions. The bare minimum might be 3 per cent of a qualifying worker’s salary, but many decent private sector firms will pay in 6-10 per cent (often, if workers pay in a little more, the company will match this).

Yes, there is a clear tax incentive to do so (salary sacrifice is estimated to save companies £2.9bn in NICs a year). But there are also 14mn good reasons for this tax break — that’s the number of workers the government estimates are under-saving for retirement, and stand to be a burden on future taxpayers.

If your employer responds by reducing staff pension contribution rates, that’s an effective pay cut. Some firms might sneakily opt to do this just for new starters. Others could cap the amount of salary that workers can sacrifice via workplace pension schemes — an administrative problem for parents trying to stay below the £100,000 salary threshold and keep valuable childcare benefits, or the £60,000 threshold above which child benefit starts to be lost.

“For the projected tax revenues this will raise, the damage this will do to the UK economy and people’s future retirement prospects is untold,” says Maike Currie, head of personal finance at PensionBee.

Higher employment costs could also be clawed back through job cuts, hiring freezes, slower pay progression or smaller bonus pools. Employers are already using all of these tactics following April’s NICs rise. The result? This week, the UK unemployment rate hit 5 per cent.

Although workers will face a proportionally lower NICs hit than their employer, higher taxes could cause them to cut their own pension contributions too. Compound the tax-free investment growth of pension contributions over your working life, and less money going into pensions from workers and employers becomes a more chilling prospect.

But the intergenerational unfairness doesn’t stop there. “If salary sacrifice is unwound, recent graduates will not just have to pay extra NICs, but extra student loan repayments too as they’ll have a higher taxable salary on paper,” says former pensions minister Sir Steve Webb, now a partner at pensions consultancy LCP.

As salary sacrifice is mostly used by private sector firms, Reeves will dodge the trade union opprobrium that would result if she tackled the unsustainable cost of gold-plated public sector pension schemes (including very generous arrangements for MPs).

And for the government even to consider such a step while simultaneously carrying out a review into pensions adequacy and how it could persuade employers to increase staff pension contributions is quite simply nuts.

Workers should not be ignorant of the huge dent this could put in their pensions. Budget decisions are not yet set in stone, so shout about this on social media, write to your local MP and ensure people wake up to the impact of this misguided tax raid before it’s too late. Otherwise, it’s our future retirement prospects that stand to be sacrificed.

Claer Barrett is the FT’s consumer editor; claer.barrett@ft.com; Instagram @ClaerB