UK Treasury Cuts Pension Savings Affecting Nearly 3 Million Workers

Official figures indicate that the UK Treasury's plan to cut pension savings by £5 billion, introduced by Finance Minister Rachel Reeves, is expected to reduce the retirement income of nearly 3 million workers.

According to estimates from Her Majesty's Revenue and Customs (HMRC), approximately 2.9 million workers will see their pension savings decrease once the new restrictions on salary sacrifice schemes come into effect in 2029.

Data obtained through a Freedom of Information request reveals that HMRC anticipates around 2.2 million higher-income taxpayers will save less as a result of the Finance Minister's decision, as reported by The Telegraph.

The Treasury defended the measure, stating that high earners currently have the ability to save substantial amounts in their pensions without paying any tax.

However, HMRC's data also shows that 666,000 of the 2.9 million affected workers are basic-rate taxpayers earning less than £50,271 annually.

Further analysis indicates that this decision will act as an additional tax on employment, with employers expected to contribute most of the £4.8 billion increase in revenue by the end of the decade.

This follows Reeves' announcement of a £25 billion reduction in employers' National Insurance contributions in her first budget.

Sir Steve Webb, the former Pensions Minister who filed the Freedom of Information request, commented that the figures demonstrate the policy "will be much more damaging than previously thought" and will undermine efforts to boost pension savings.

Salary sacrifice schemes allow employees to give up part of their salary in exchange for tax-free benefits.

Currently, pension contributions made through these schemes are exempt from income tax and National Insurance.

Employers also benefit from reduced National Insurance payments when employees participate in these schemes, since the tax applies only to the remaining salary after pension contributions.

However, in her second budget, the Finance Minister announced a £2,000 cap on the amount employees can contribute to pensions via salary sacrifice before contributions become subject to National Insurance. The Treasury estimates this will generate £4 billion in revenue.

Figures further reveal that the Office for Budget Responsibility expects employers to bear most of the tax burden, with £3 billion of the total in 2029-2030 coming from additional employer National Insurance contributions.

Sir Steve, now a partner at consultancy LCP, said: "The government presented changes to salary sacrifice for pensions as a relatively straightforward way to reduce a tax break mainly benefiting the wealthy. But these figures show the policy’s impact will be far more harmful than previously believed."

The data was published less than a month after a historic pensions review warned that 15 million people are not saving enough for retirement.

The report highlighted that middle-income earners, women, and self-employed workers are the most at risk.

Sir Steve added: "While the government is running a key committee to address the pension savings shortfall, it is shocking that a separate government policy will reduce pension savings for over 2.9 million workers. Almost 25% of these are basic-rate taxpayers. It makes no sense for the government to stress the need to increase pension savings one day, then implement a policy the next day that reduces pension savings for millions."

A separate analysis by the Institute for Fiscal Studies (IFS) found that one million households will face financial losses averaging nearly £900 annually due to the reduction in salary sacrifice allowances.

Companies are expected to attempt to offset these losses by offering smaller pay raises to employees.

A spokesperson for the UK Treasury stated: "High earners have received huge benefits through salary sacrifice without paying any tax — a taxpayer-funded advantage that disproportionately benefits the wealthy. Our fair reforms protect 95% of workers earning less than £30,000 annually who use salary sacrifice schemes, and as shown by the Institute for Fiscal Studies analysis, more than three-quarters of those under 30 will not be affected."