Chancellor Rachel Reeves will announce major pension changes in Wednesday's Budget that could affect millions of workers and current pensioners. Reports suggest a tax raid on salary sacrifice schemes worth up to £4 billion alongside a confirmed state pension increase.
The government is reportedly considering restrictions on salary sacrifice pension schemes. Millions of private sector workers use these schemes. Some reports suggest a potential cap at £2,000 a year for people sacrificing their salary while still receiving tax benefits, though other reports indicate restrictions could go further.
Salary sacrifice schemes allow employees to "give up" a chunk of their salary in exchange for their employer paying the whole amount into their pension, including the employer's contribution. This creates tax advantages for both workers and businesses through lower national insurance contributions.
Industry warnings
The Association of British Insurers and major pensions providers have urged Reeves not to proceed with such changes, warning it could raise between £2 billion to £4 billion but at significant cost to retirement security.
Yvonne Braun, director of policy, long-term savings at the ABI, said: "The industry has long-warned that we're 'sleep-walking' into a retirement crisis. If the Government goes ahead with suggestions to cap salary sacrifice, then we're no longer sleep-walking, we're speed-walking."
Pensions industry bodies warn that curbing salary sacrifice would mean people and employers cutting back on pension contributions, storing up problems for savers and putting more cost pressures on businesses. The ABI and the Reward and Employee Benefits Association have warned such a step would place additional strain on businesses and push millions into poorer retirements.
State pension increase confirmed
Meanwhile, Reeves has confirmed the state pension will increase by approximately £550 a year from April next year under the triple lock rule, which guarantees an increase by the highest of inflation, wage growth, or 2.5 per cent.
The full new state pension will rise from £230.25 to £241.05 per week, bringing the annual amount to approximately £12,534. Pat McFadden, Work and Pensions Secretary, said: "This Labour government is committed to maintaining the triple lock for the course of this parliament. Officials estimate this will mean a rise in the state pension of around £1,900 a year by the end of the parliament."
Reeves said: "Whether it's our commitment to the triple lock or to rebuilding our NHS to cut waiting lists, we're supporting pensioners to give them the security in retirement they deserve."
Tax threshold paradox
The increase creates a new challenge: the state pension will reach 99.7 per cent of the frozen personal allowance of £12,570, meaning pensioners will need just £35.40 of other income before paying income tax.
Rachel Vahey, head of public policy at AJ Bell, said: "This poses a significant conundrum for Rachel Reeves and the Treasury. If, as is likely, the triple lock sees the state pension increase above the personal allowance of £12,570 in April 2027 for the first time, then the government will come under increasing pressure to make a decision [...]"
Removing the freeze on the personal allowance would come at significant cost to the Treasury, while overhauling the triple lock would carry huge political risk before the next general election.
Many workers already face retirement income challenges. Although automatic enrolment has brought millions into pension saving, too many workers are not saving enough for a comfortable retirement.
Cost-of-living squeezes in recent years have further impacted people's ability to save, while frozen income tax thresholds drag workers into higher tax bands.
Note: This article was created with Artificial Intelligence (AI).
