Chancellor Rachel Reeves is preparing a multibillion-pound tax grab on workplace pensions in a move that could strip up to £4 billion from the pockets of workers and employers alike, another blow to those already struggling under Labour’s growing tax burden.
According to Treasury sources, Ms Reeves is targeting “salary sacrifice” pension schemes, a longstanding arrangement that allows workers to contribute to their retirement pots before paying income tax or National Insurance. The system benefits both employees and companies, helping millions save more for their future.
However, the Labour Chancellor appears poised to curb or cap the tax relief, in what critics are calling a direct raid on middle earners and responsible businesses.
Under current rules, employers also enjoy lower National Insurance contributions because the tax is only charged on earnings after pension deductions. Reeves reportedly wants to restrict how much can be contributed tax-free, effectively ending one of the few remaining incentives for companies to offer strong pension benefits.
Analysis from May shows that someone earning £35,000 a year, the UK’s median wage, would pay around £210 more in National Insurance if the exemptions were scrapped. Employers matching contributions would be hit for another £242 per worker.
Despite these impacts, Ms Reeves insists those with the “broadest shoulders” will shoulder the cost of Labour’s tax rises. In reality, experts warn it will hit average earners and smaller firms the hardest.
Sir Steve Webb, a former pensions minister and now LCP partner, warned:
“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.”
Even HMRC’s own analysis suggests that abolishing the system outright could leave millions of ordinary savers worse off. LCP estimates more than three million basic rate taxpayers could lose out if Reeves goes ahead.
Sir Mel Stride, the shadow chancellor, condemned the plan, saying:
“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.”
While Labour officials are said to favour capping National Insurance relief at around £2,000 per year, experts note this would still add costs for millions. Someone earning £45,000 who sacrifices 5 percent of their salary would face an extra £30 in tax, while their employer would pay another £34, on top of Labour’s earlier £25bn National Insurance hike.
Economists warn the move could push employers to cut staff contributions, reduce pay, or even hire fewer workers. Andy Summers of the Centre for the Analysis of Taxation said:
“Some employers would reduce their contribution rate, resulting in smaller pension pots for workers. Others may keep existing contribution rates but hold down pay or employ fewer workers to cover their extra costs.”
The plans are the latest sign that Reeves intends to squeeze every possible penny from taxpayers to fill a self-inflicted £40bn hole in Labour’s books. Treasury insiders claim the Chancellor sees these so-called “perks” as an easy source of cash, even as millions face higher living costs and uncertain retirements.
Despite the backlash, a Treasury spokesman refused to deny the plans, saying only: “We do not comment on speculation around changes to tax outside of fiscal events.”
With trust in Labour’s economic management already faltering, this latest move risks alienating the very workers and employers Britain depends on, and confirms what many feared, no one’s savings are safe under Rachel Reeves.
