CHANCELLOR Rachel Reeves is reportedly planning a £240 a year pay cut for workers in a “stealth tax raid” on retirement savings.
In the Budget later this month Reeves is expected to target salary sacrifice pensions with a cap on how much a worker can save tax-free, according to The Times.
Salary sacrifice allows an employee to deposit a share of their income, which is matched by their employer, into a pension scheme.
At the moment, there’s no limit on how much workers can save before paying national insurance.
But workers would have to pay the full rate of NI once they saved £2,000.
A worker earning £50,270 a year paying in 6% of their salary would lose £80.
While the same worker paying in 10% would lose £240, by paying extra in national insurance.
The move could raise up to £2 billion a year.
The Chancellor will be delivering her budget plans to the House on November 26.
Instead of targeting lump-sum withdrawals the chancellor is understood to be aiming at salary sacrifice schemes as she tries to plug a gap in the public finances.
It’s recommended employees save at least 15 per cent of their salary for retirement – with concerns raised that people “trying to do the right thing” are being targeted.
Steve Webb, partner at pension consultants LCP, told The Times: “Salary sacrifice schemes have been around for a long time and are a way of encouraging employers to offer good workplace pensions.
“Introducing a cap would increase national insurance bills mostly for employers and hits the very firms who are doing the right thing.
“Once a cap is in place, there will be a widespread expectation that this is the thin end of the wedge and eventual abolition is on the cards. At a time when we need workers and firms to put more focus on pensions, this would be a seriously backward step.”
Earlier this week Rachel Reeves told the budget watchdog that she planned to increase income tax, which would be a breach of Labour’s manifesto.
Deputy leader of the Labour Party Lucy Powell has reportedly previously warned Reeves that breaking the party’s pledge not to raise income tax would erode the public’s trust.
Reeves previously told the Office for Budget Responsibility (OBR) that an increase in personal taxation is one of the “major measures” she is gearing up to announce later this month.
Her proposals are not set in stone and she could still back away from any possible tax rise.
If income tax is increased though it will break Labour’s manifesto pledge not to increase income tax rates.