HMRC's potential pension tax changes could cost UK workers £560

Millions of workers could face a tax raid on their , with concerns mounting that the Treasury is planning to take funds through major overhauls to salary sacrifice arrangements. Salary sacrifice involves employees agreeing to forgo part of their gross salary in return for non-cash benefits from their employer, such as pension contributions or a company car.

This setup enables both the employee and employer to save on income tax and National Insurance contributions on the amount "sacrificed". But in what has been termed "very revealing" by ex-pensions minister Sir Steve Webb, HM Revenue and Customs (HMRC) has quietly published research exploring ways to cut back tax and National Insurance perks that currently benefit those saving into workplace pensions.

Industry experts say these proposals could result in the average worker being £560 out of pocket a year. The revelations emerge as Chancellor faces increasing pressure to address a gaping deficit in public finances, which could be up to £30 billion due to costly benefit commitments, escalating borrowing costs, and worldwide economic instability.

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The proposals, disclosed in an obscure HMRC document, probe employers' responses to three radical alterations to salary sacrifice, a mechanism employed by half of British companies to assist employees in enhancing their retirement savings by reducing their income tax and NI contributions.

One potential scenario could see both tax and National Insurance exemptions completely abolished, hitting both employees and employers hard. An average worker earning £35,000 annually would lose £560, while their employer would face an additional £241 charge, reports .

Another possibility involves only removing National Insurance relief, which would still cost workers over £200 and employers the same amount. A third, less drastic proposal, suggests eliminating NI breaks only on contributions exceeding £2,000 - impacting higher earners but potentially discouraging many from saving more.

'This would be bad for everyone'.

Sir Steve Webb, currently a partner at pensions consultancy LCP, commented: "It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back. Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today."

He added: "With a Chancellor reportedly looking to makeup a multibillion-pound hole in the public finances in her autumn , this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure."

Critics argue that such a move would deliver a 'double whammy' to savers - either contribute more to their pensions now or face a significantly smaller retirement fund in the future.

Jonathan Watts-Lay from Wealth at Work, a firm specialising in retirement planning, has voiced concerns over the potential financial impact on future pensions: "It would be bad for everyone. Whether they just do National Insurance or National Insurance and income tax, the fundamental of all those scenarios is that [people] have less money going into their pension unless they up their contributions.

"You're basically saying to someone you either need to pay more money, or you carry on and your pot will be smaller when you get to retirement. There's no positive impact of it. They either take the pain, or they take the pain when they get to retirement."

The revelations come amid reports that high earners are increasingly turning to salary sacrifice schemes as a means to reduce their taxable income and sidestep hefty tax rates or forfeiting state benefits such as complimentary childcare.

Currently, earning slightly above £100,000 can result in an effective tax rate of 60% and loss of entitlement to 30 hours of free childcare. On top of this, Labour's expanding roster of benefit commitments, which includes re-evaluating the two-child benefit limit and reinstating winter fuel payments for all pensioners, is piling on the fiscal pressure.

This week, the National Institute of Economic and Social Research (NIESR) issued a warning that Reeves might need to find as much as £30 billion in the autumn Budget to fulfil her pledges, despite Labour's manifesto promise not to hike income tax, National Insurance, or VAT.

Research conducted by HMRC last year, involving 51 employers and only recently published, indicates that most companies regard salary sacrifice as a crucial part of their benefits package, aiding in staff retention. Some firms pass National Insurance (NI) savings back to employees, while others absorb them.

However, the response to potential reforms was predominantly negative. Employers cautioned that abolishing tax and NI breaks would "eliminate the benefit" of offering salary sacrifice altogether.

Rachel Reeves, as a backbencher, once advocated for the abolition of higher rate pension tax relief in favour of a flat 33%, sparking concerns among savers that she might still support such measures.

A Treasury spokesperson responded: "These claims are totally speculative. HMRC regularly commissions independent research on all aspects of the tax system. We are committed to keeping taxes for working people as low as possible."