MPs agree cap on pension salary sacrifice relief

Opening the debate, the Parliamentary Secretary to the Treasury, Torsten Bell, described the Bill as “short and simple”, introducing a new power to apply NICs to pension salary sacrifice contributions above £2,000 from April 2029. He argued that reform was unavoidable given the rapid growth in the cost of the relief.

“It is always important to keep the effectiveness and value for money of tax reliefs under review,” Bell told MPs, noting that the cost of pension salary sacrifice was “on course to almost treble between 2017 and the end of this decade… to £8 billion a year”. For context, he added, that figure would be “the equivalent of the cost of the Royal Air Force”.

Bell pointed out that “the majority of employers do not offer salary sacrifice at all, including many small businesses”, while “workers on the national living wage are excluded entirely, and so are the 4.4 million self-employed people across the UK”. On that basis, he argued, “on grounds of cost and fairness, it is near impossible to defend the status quo”.

The government has opted for a cap rather than abolition, a choice Bell characterised as “pragmatic and balanced”. The £2,000 threshold, he said, means that “almost all—95%—of those earning £30,000 or less… will be entirely unaffected”, while “87% of affected salary sacrifice contributions above the cap are forecast to be made by higher and additional rate taxpayers”.

However, Bell stressed that “nothing will change overnight”, with implementation delayed until 2029. This, he said, contrasted with previous reforms, noting that “the previous government provided one year’s notice” for changes to salary sacrifice arrangements.

Opposition MPs accepted that the cost of salary sacrifice had grown, but challenged the government’s plans. Shadow Economic Secretary Mark Garnier described the measure as “a tax on 3.3 million people and 290,000 employers”, arguing that it punished those “doing the right thing… to save a little bit more, to take responsibility for their futures”.

Garnier warned that behavioural change would undermine the projected revenue, citing the Office for Budget Responsibility’s view that receipts would fall sharply after the first year. “Even the government lose out,” he said, claiming that people would simply reduce contributions or restructure pay.

Several MPs raised concerns about the overall suitability of the pension system. Liberal Democrat spokesperson Steve Darling told the House that there are “about 12 million people falling short” on retirement saving. He warned that the change could mean “long-term pain for the taxpayer” if fewer people were able to support themselves in old age.

For the SNP Graham Leadbitter said it was not clear the change would raise the money expected. However it would “land businesses with yet more administrative costs, disproportionately hitting small to medium-sized employers who are still absorbing the increased NIC costs from last year’s Budget.”

Only one Labour backbencher spoke in the debate. Jim Dickson, a member of the Treasury Committee, said the Chancellor had delivered “a Budget of necessary and fair choices on tax” and this measure was one of them.

Shadow Chief Secretary to the Treasury Richard Fuller wound up the debate for the opposition. He claimed that the Bill made a mockery of the government’s Pensions Commission, set up in July this year, which had warned of the risk of falling private pension income. He suggested the Bill was “yet another example of the lack of private sector experience on the government front bench”.

Responding to the opposition’s criticisms, ministers rejected the claim that salary sacrifice was a key driver of pension saving. Torsten Bell argued that “what made the difference was not the complicated national insurance reliefs available to some employees, but automatic enrolment”. He noted that salary sacrifice existed during a period when pension participation fell sharply, whereas automatic enrolment had since brought “over 22 million workers” into pension saving.

Responding to claims that the policy discouraged saving, Bell urged MPs to be clear with the public: “Pension saving will remain highly tax-advantaged after these changes,” he said, with more than £70 billion a year still spent on pension tax relief.

Closing the debate, the Exchequer Secretary to the Treasury, Dan Tomlinson, said the reform was about targeting relief more fairly. “We are not removing pension tax relief,” he said, “just the ability for unlimited relief via salary sacrifice, which many people cannot access in any case.”

The Bill passed the Second Reading and will now proceed to further stages in the New Year.

Read the full debate.