The £5 billion tax rise on salary sacrifice pension schemes announced in Rachel Reeves’ budget has proven to be the most damaging measure for business confidence, according to new research from the Confederation of British Industry.
Almost three quarters (73%) of companies surveyed by the CBI said charging social security contributions on pension salary sacrifice above a new cap was the most damaging measure in the budget.
The survey of more than 100 companies and trade associations found that the mood across the business sector remains gloomy following the Chancellor’s stimulus package. Some 84% of respondents said the Budget would not help reduce the cost of doing business, while 62% said it would not boost confidence in innovation or growth investments.
Business leaders are particularly concerned about the cumulative impact of policy changes, including higher rates for businesses, higher-than-inflation increases in the minimum wage and rising employers’ social security costs. Taken together, they argue, these measures are squeezing margins at a time when companies are already struggling with weak demand and economic uncertainty.
In the current system, salary sacrifice schemes allow employees to reduce their taxable income by paying pension contributions directly from their salary, thereby reducing both income tax and national insurance. Employers also benefit by paying Social Security only on reduced salary, which often allows them to offer more generous pension contributions.
However, from 2029, the Chancellor’s reforms will cap pension contributions for salary sacrifice at £2,000 a year. For contributions above this limit, the employee’s national insurance will be credited at 8% on earnings below £50,268 and 2% above this threshold, while employers will pay the full employer NICs at 15%.
The Treasury estimates the measure will raise £4.8 billion in the first year. Its own impact assessment suggests that around 3.3 million people are currently sacrificing more than £2,000 a year on their pension and therefore face higher national insurance bills.
Companies warn that the additional cost burden will inevitably be reflected in lower employer pension contributions. The CBI has previously calculated that even a small reduction in employer contributions could significantly reduce retirement savings over time. A 22-year-old average-earning man who pays 9% of his salary into a pension could see his retirement fund shrink by almost £25,000 if employer contributions were reduced by just one percentage point.
CBI survey respondents were blunt in their assessments. A professional services firm described the cap as an indirect tax on pensions, while a London-based services firm said it would affect a “large number of middle earners”. A construction company in the north of England warned that the policy would almost certainly force companies to cut employer pension contributions.
Louise Hellem, chief economist at the CBI, said the policy risks creating long-term problems for both households and public finances. “People are already saving far too little for retirement,” she said. “While this may increase Treasury revenues in the short term, there is a risk that future governments with retirees will be less able to afford a comfortable lifestyle or their own care.”
She added that the measure, coupled with higher social security and wage costs, further penalizes employment and reduces companies’ ability to invest. “At a time when we need overall economic growth to accelerate, this is another headwind slowing businesses.”
