How a Stealth Tax on Pensions Could Backfire: A Double Whammy for Taxpayers
The government's plan to raise taxes on pension contributions could have unintended consequences, experts warn. Rachel Reeves' proposal to limit a tax break on pension contributions might create an unexpected additional cost for taxpayers, on top of preventing savers from boosting their retirement funds.
If the Chancellor proceeds with the plan to reduce tax breaks for employees and employers in this month's budget, the government could end up paying more to top up public sector pensions. The Times first reported that the proposals would raise up to £2 billion annually by placing a £2,000 annual limit on the amount of salary that can be sacrificed into pensions without incurring National Insurance (NI) payments.
Tom Selby, director of public policy at pensions platform AJ Bell, warns of 'knock-on impacts' on employers' costs through higher NI payments if a limit is introduced, including in the public sector, which is primarily funded by taxes. He states, 'While salary sacrifice is less prevalent in the public sector, this move would increase pension costs for employers.'
According to the Society of Pension Professionals, almost 10% of public sector workers use salary sacrifice schemes to boost their pensions. Becky O'Connor, director of public affairs at PensionBee, highlights potential problems with the government's approach. If an exemption for public sector workers is introduced, it could make these schemes more attractive and increase the sense of unfairness between public and private sector pensioners. Alternatively, if public sector workers are forced to pay extra NI, their take-home pay could fall, making participation less appealing.
Ian Cook, a chartered financial planner, agrees that the government could 'add to their own tax burden' depending on how the changes are applied. He suggests that either public sector workers will pay more, or the government will need to cover the additional costs. A Treasury spokesperson declined to comment on speculation regarding tax changes outside of fiscal events.
The article concludes by inviting readers to consider the potential implications and engage in the discussion, encouraging them to share their thoughts in the comments.
