The Chancellor is facing a growing backlash over fears millions of workers face a stealth tax raid on their pensions.
A quietly released HM Revenue and Customs (HMRC) report has triggered a wave of anger across the pensions and business sectors, with experts warning that proposed changes could leave the average earner £560 worse off annually.
Salary sacrifice, used by around half of UK employers, allows staff to give up part of their gross salary in exchange for non-cash benefits like pension contributions—cutting both income tax and National Insurance bills in the process.
But research commissioned by HMRC explores three drastic reforms to the system, each of which would reduce or remove these tax breaks.
One proposal would scrap both income tax and National Insurance exemptions on sacrificed earnings. Another would axe NI relief altogether, while a third would remove breaks only for contributions over £2,000.
Former pensions minister Sir Steve Webb said: “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.
“With a Chancellor reportedly looking to make up a multibillion-pound hole in the public finances in her autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure.”
Financial planning expert Gary Smith, of Evelyn Partners, warned that any reform would risk doing long-term damage to pension savings.
He said: “Salary sacrifice is a very efficient and effective way for employees to save into pensions, and it seems inevitable that watering it down – or dismantling it altogether – would hit pension saving… because faith in the pension system would be dented by more Government interference.
“You can therefore see why a cash-strapped Government might be tempted to deter salary sacrifice or make it less attractive, but if SS reform were to be seriously considered, employers who have introduced or started to introduce SS, as well as millions of employees, will be wondering which way to turn.”
Kate Smith, Head of Pensions at Aegon, said the timing of the report’s release had “turbo-charged speculation” that Chancellor Rachel Reeves may be eyeing cuts to the system as she scrambles to fill an estimated £30billion black hole in the public finances.
She said: “Any move to reduce or remove the benefits of salary sacrifice would be a blow to both employers and pension savers… While no policy changes have been confirmed, the release of this research has intensified scrutiny ahead of the Budget.”
Jonathan Watts-Lay, of retirement experts Wealth at Work, added: “It would be bad for everyone… 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.”
The government is under mounting pressure to fund a string of spending commitments—including childcare, welfare reforms, and restoring benefits for pensioners—without breaking its manifesto pledge not to raise income tax, National Insurance or VAT.
Critics say raiding salary sacrifice schemes would be a “soft target” that disproportionately penalises prudent savers, and could discourage contributions at a time when many workers are already struggling with the cost of living.
However, the Treasury has sought to downplay the backlash, insisting no decisions have been made.
A spokesperson said: “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.”
