“Did she make a mistake? Does she understand?” So asks someoone on a Reddit post discussing Rachel Reeves’ proposed £2,000 cap on salary sacrificed pension contributions, announced at the 2025 Budget.
They are convinced that the Chancellor meant to announce that there would be a cap at £2,000 a month, because an annual cap at that level would catch people with “worryingly low” retirement prospects.
It’s quite sweet in a way. The poster is certain that there must be a mistake but, no, that is the plan and new analysis suggests that even more people are going to be caught than originally thought. In short, this is going to catch many millions of employees, and certainly not just the fat cats the Government keeps claiming it reserves its tax raids for.
That Reddit user aside, you can see why Reeves went for salary sacrifice. It doesn’t take effect until 2029 and… what even is salary sacrifice anyway? The long lead in time, and the fact that most people have never heard of this accounting quirk, including many of those who benefit from it, make it the perfect victim of a tax grab.
With all the kite-flying and noise ahead of the 2025 Budget, Reeves’ second, the Treasury decided trimming this perk was far less likely to get middle England exercised compared to, say, cutting the tax-free lump sum on pensions, or higher-rate tax relief on pension contributions.
At the Budget, the Government said it reckoned the change would raise £4.8bn in 2029-30, dropping in later years. With all policy changes, there is a lot of uncertainty about how much the policy will lose or raise in tax. So-called “behavioural effects” cast huge doubts over returns and all governments are flying relatively blind when they make complex reforms like this.
In 2020 over-75s lost their free BBC licences, unless they were on pension credit, a benefit that had long been underclaimed through lack of awareness. Losing their free licences galvanised pensioners who began claiming pension credit in far higher numbers, which led to the state paying out more in benefits.
The winter fuel payment debacle – where payments were initially to be given only to those on pension credit – further increased awareness and uptake. It became Starmer and Reeves’ first, and perhaps most stupid, U-turn. The point is – it’s very hard to accurately predict how millions of people, or employers, will react to your policies.
And now it seems the new salary sacrifice cut will be added to the list of recent policy muck-ups (to put it politely). As with other attacks on “those with the broadest shoulders”, ordinary people are destined to be victims.
Independent forecasting from the Office for Budget Responsibility suggests that, despite Government assurances, people on normal incomes will not be “protected” – and they will have smaller pensions as a result.
Official analysis after the Budget stated that of the nearly eight million employees who make pension contributions using salary sacrifice, only around 3.3 million sacrifice more than £2,000 a year.
An HMRC policy paper concluded that this means 56pc of those using salary sacrifice are “fully protected” from the £2,000 cap because they don’t hit it at the moment.
But the eagle eyes of Steve Webb, a partner at LCP and a former pensions minister, spotted earlier this month that the OBR disagrees. It thinks that millions of other people, supposedly protected, would be caught out because employers will have to make decisions that affect all their staff, high and low earners alike.
We shouldn’t forget that employers are also being targeted in this raid, despite Reeves previously claiming she wasn’t going to be coming back for more from businesses after her first Budget, which dramatically increased employer National Insurance contributions.
The OBR thinks it is very likely that businesses will cut pension contributions, wages, or both. They might also switch to “relief at source” schemes to ease the administrative burden. Doing so means higher and top-rate taxpayers would have to claim back the additional tax relief in their tax returns rather than getting it automatically.
Whatever the Government claims, most of us will feel the impact of this wrong-headed reform in some way. The House of Lords appears to agree, voting through a number of amendments to this policy, including raising the cap to £5,000 a year, and limiting it to just higher- and additional-rate taxpayers. It remains to be seen if this prompts a Government rethink.
It’s becoming boring pointing out just how bad Starmer and Reeves appear to be at politics
But once again it seems – by design or otherwise – Labour isn’t just going after the truly wealthy. It’s hitting straight to the heart of the middle classes.
