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Rachel Reeves is reportedly preparing to target tax breaks on pension contributions in the Autumn Budget — a move that could raise up to £4 billion for the government. The Chancellor is understood to be considering reforms to tax relief for workers and employers who pay into workplace pensions through “salary sacrifice” schemes. These schemes allow employees to make pension contributions before income tax or National Insurance is applied. However, critics warn that scrapping or restricting them could cost the average worker around £210 a year, according to The Telegraph. Large companies also benefit from the system through reduced National Insurance contributions. Ms Reeves is said to be weighing up a plan to limit the amount of tax-free income that can be placed into such pension pots. It would not be the first time the system has come under review, with HMRC previously exploring potential reforms. Analysis earlier this year found that a worker earning £35,000 and contributing 5% of their salary to a pension via salary sacrifice would face an additional £210 in National Insurance if the exemption were removed. Their employer would also lose around £242 if they matched the contribution. One option reportedly under consideration would be to cap the relief at £2,000 per year — protecting average earners and their employers from higher National Insurance costs while limiting the benefit for higher earners. HMRC estimates that a worker on £45,000 contributing 5% of their income would pay £30 more in National Insurance under this model, while the employer would lose around £34. Shadow Chancellor Sir Mel Stride said: “If Rachel Reeves really is planning to cap salary sacrifice relief, it’s another reckless hit on business and jobs. “Starmer and Reeves promised no more tax rises after their disastrous Budget last year – if they break their word again, the Chancellor has to go.” Ms Reeves is seeking ways to close a £40 billion shortfall in public finances, with Treasury insiders noting that National Insurance savings through salary sacrifice mainly benefit large employers because of the administrative costs involved. Data also shows that more than three-quarters of income tax relief from salary sacrifice goes to higher and additional rate taxpayers. The reports come as Reeves insists those with “the broadest shoulders” should contribute more to help balance the books. However, some experts warn that cutting back the benefit could discourage saving for retirement. Sir Steve Webb, former pensions minister, said: “Previous governments have allowed salary sacrifice for pension contributions to encourage firms to provide good pensions. “If it was abolished it would penalise the best employers and make it less attractive to offer decent pensions. A more modest reform would be to cap the amount which can be sacrificed, and HMRC have tested employer opinion on this option as well.” A Treasury spokesman said: “We do not comment on speculation around changes to tax outside of fiscal events.”
