HMRC's examination suggests possible alterations to pension taxes in the upcoming autumn
The UK's Autumn Budget of 2022 has sparked a potential overhaul of the tax benefits for salary sacrifice pension schemes, which may significantly impact the household finances of average earners and their retirement savings.
HM Revenue and Customs (HMRC) has delved into the possibility of scrapping the current tax perks bestowed upon salary sacrifice pension contributions, as part of a review of workplace pensions. This move could ultimately lead to the eradication of this tax advantage.
The scrappage of these tax exemptions would mean employees would no longer reap the benefits of reduced taxable income, subsequently leading to increased income tax and National Insurance deductions, thereby increasing their overall tax burdens. To maintain similar levels of pension contributions and retirement savings, employees may be compelled to progressively increase their gross contributions, resulting in lower take-home pay in the short term or smaller pension pots at retirement if contributions remain unchanged.
This proposal has been likened to a "stealth tax," as it would possibly leave workers less well-off, either contributing more in taxes or ending up with smaller pension pots, without any apparent long-term financial benefits. The uncertainty and potential weakening of pension tax incentives may discourage workers from saving for retirement, potentially leading to an increased reliance on government support in the future.
The review has also elicited fears that the Chancellor might implement policies adding National Insurance or both National Insurance and income tax to salary sacrifice pension contributions in order to augment revenue and offset government borrowing. Such actions would further exacerbate the financial squeeze on the average earner.
Former pensions minister Sir Steve Webb observed that the HMRC's review places a pension tax raid "firmly on the agenda." Webb also pointed out that the government's current borrowing levels have heightened the need for additional revenue.
In April this year, government borrowing soared to £20.2bn, outpacing economists' projections of £18bn. Labour has also been reconsidering previously planned cuts to winter fuel allowances and the two-child benefit cap, which could leave Chancellor Rachel Reeves with a £30bn shortfall, according to the National Institute of Economic and Social Research.
The Treasury has refuted any speculation regarding potential tax hikes, stating that they remain committed to keeping taxes for working people low. However, experts warn that curtailing pension tax benefits could hinder pension savings and potentially impair the financial security of workers during retirement.
- The potential overhaul of the tax benefits for salary sacrifice pension schemes, as part of a review of workplace pensions, could result in increased taxes and National Insurance deductions for employees.
- If the tax exemptions for salary sacrifice pension contributions are scrapped, workers might need to increase their gross contributions to maintain similar levels of pension savings, which could lead to lower take-home pay in the short term or smaller pension pots at retirement.
- The proposed changes in pension tax benefits have been compared to a "stealth tax," as they could leave workers less well-off without any apparent long-term financial benefits.
- The increased government borrowing, such as the £20.2bn borrowed in April 2022, has sparked discussions about implementing additional National Insurance or income taxes on salary sacrifice pension contributions to augment revenue and offset borrowing.
