The Government estimates that up to 2.9m people could cut back on pension saving as a result of the salary sacrifice changes planned by the Treasury.
The figure emerged from an FOI request to HMRC by LCP partner and former Pensions Minister Steve Webb.
Mr Webb said: “The Government has presented the changes to salary sacrifice for pensions as being a relatively painless way of cracking down on a growing tax break mostly enjoyed by the well off. But these figures show that the effects of the policy will be far more damaging than had previously been admitted.”
The proposed £2,000 cap on salary sacrifice on pensions was announced by Chancellor Rachel Reeves in her Autumn Budget, during which she claimed it would save the Government around £4.7bn. The cap is expected to come into force in April 2029.
Mr Webb said that a key ‘behavioural’ impact of the salary sacrifice change, according to the OBR’s assessment, is that some people are likely to cut back on the amount they save into a pension.
In simple terms, if someone’s NI bill goes up as a result of the 2029 changes, they may try to reduce the impact on their disposable income by saving less into a pension.
Mr Webb said that until now there have been no published figures on the numbers likely to behave in this way. But the final FOI reveals that almost 2.9m workers are expected to cut back on pension saving, as shown in the table from the FOI, which shows the number of employees that are assumed to cut their contributions in 29/30.
| Number of employees |
Above Upper Earnings Limit (UEL) reducing contributions | 2,222,000 |
Between UEL and Personal Allowance (PA) reducing contributions | 666,000 |
Source: HMRC FOI reply
Most of those earning above the ‘Upper Earnings Limit’ (currently £50,270 per year) are likely to be higher rate taxpayers, but the 666,000 people will generally be basic rate taxpayers, Mr Webb said, adding that the OBR has previously estimated that it is lower earners who will reduce their contributions by the most.
Mr Webb said: “At a time when the Government is running a major Commission to tackle the issue of pension under-saving, it is shocking that a separate government policy will result in over 2.8m workers cutting back on pension saving.
“Nearly one in four of these are basic rate taxpayers. It is hardly ‘joined-up government’ to be stressing the need for more pension saving one day and then implementing a policy that will reduce the pension savings of millions the next.”
It said that 46% of salary sacrifice users expect to save less in pensions as a result of the planned salary sacrifice changes.