In the flurry of briefings ahead of the Chancellor’s autumn Budget, one rumoured measure risks doing more long-term damage than most people realise: a cap or cut to the salary-sacrifice pension scheme.
For those not steeped in the jargon, this is the mechanism that allows workers and employers to make pension contributions free of National Insurance. It’s one of the few genuinely effective incentives for people to save for retirement — particularly for those who don’t yet earn enough to make personal tax relief a meaningful motivator.
Yet according to multiple reports, the Treasury is considering capping the amount that can be contributed through salary sacrifice, potentially at just £2,000 a year. Beyond that, both employee and employer would pay full National Insurance. The Government hopes to raise around £2 billion annually from the change — a tiny sum in fiscal terms, but one that could hit younger and mid-career workers hardest.
As Claer Barrett, the Financial Times Consumer Editor, put it recently, the idea is “nuts” — especially given that the same Treasury is currently running a review aimed at encouraging higher pension contributions. Becky O’Connor from PensionBee warned that the move “will do untold damage to the savings system and hit younger workers hardest.” And Tom Selby of AJ Bell said it would “deter good employers from contributing more” — the exact opposite of what the country needs as we face rising longevity and care costs.
While it might seem politically expedient to “go after” higher earners, many of those affected — myself included — are people who started earning later because of university and postgraduate training. We missed the key early years of pension saving, and we’re unlikely to qualify for any other forms of state assistance in retirement. Weakening private pensions now doesn’t punish the rich — it punishes the responsible.
Why this matters for younger Liberals
Younger Liberals should care deeply about this. Many of today’s under-30s face a future where the state pension may not even exist in its current form. The Office for Budget Responsibility projects that by the 2050s, there will be barely two working adults for every pensioner. If we undermine private saving now, we are setting up an intergenerational time bomb — one that today’s youth will be forced to defuse.
The Liberal Democrats have always stood for fairness across generations, for responsible public finances, and for giving people the tools to build security for themselves. Cutting salary-sacrifice schemes runs directly counter to those principles. It’s short-term politics at its worst: a grab for revenue today that will leave future taxpayers footing a far bigger bill tomorrow.
What we can do
If you’re a younger Liberal — or anyone who believes in responsible, forward-looking policy — now is the time to speak up.
- Write to your MP (even if they’re not a Lib Dem) and explain how this affects you or your peers.
- Post online to raise awareness; most people under 45 have never even heard of salary sacrifice, yet it could shape their retirement security.
- Share the analysis from credible voices like Claer Barrett, Becky O’Connor and Tom Selby to show that this isn’t just political scaremongering — it’s sound economic concern.
This policy is, at its heart, an attack on people trying to do the right thing — saving responsibly, investing for the future, and staying out of dependence on the state. As Liberals, we should be defending that principle with everything we’ve got.
Because if we don’t, we may find that by the time our younger generations retire, there’s nothing left for them to retire on.
* Neil Casey is Vice Convener - Policy, Scottish Liberal Democrats. The views expressed in this article are those of the author and do not necessarily reflect the policy of the Scottish Liberal Democrats.
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8 Comments
Is there any data available as to the demographics of people who take advantage of salary sacrifice?
I may be completely wrong (and would be pleased to be proven so), but I struggle to imagine many under-30s taking advantage of the scheme when other things like rent are so expensive.
I seem to remember Gordon Brown, as Chancellor, taxing pension funds in some way. It all sounded very reasonable at the time, but it resulted in some funds being destablised and having to undergo re-assessment of the policies.
@Ian – I forget the details, but I have read a great deal which suggests that Brown’s tax changes inflicted massive damage on pension schemes generally.
The problem with Brown’s approach in that and many other respects during virtually the whole of his time as Chancellor was, I think, that he was playing smoke and mirrors – trying to massage the figures to make the national finances look sounder than they really were. The most catastrophic instance of that was the use of PFI to fund public sector infrastructure projects while nominally keeping most of the cost off the balance sheet.
I don’t particularly blame Brown. As a nation, we seem to be incapable of having a mature and intellectually honest discussion about tax and spending. We want Scandi levels of public service on American levels of tax.
Reeves may well find herself signing her party’s death warrant in the Budget – an increase in income tax is likely to be tuition fees to the power x – but may also just possibly be doing the right thing.
Well said – I am solidly of the view that I will never get the state pension so therefore am planning accordingly.
I was planning to use salary sacrifice when the public sector pension is eventually reformed.
Thanks for this poignant article on recent rumours, in a climate where there are many many workers not meeting the amounts for a continuity in living standards in retirement, it seems barmy that we would disincentivise pensions savings now. Judith Freedman has raised this week (which we could easily talk about) is looking for how we could create a tax deduction allowance for everyone on saving for pensions, not just through salary sacrifice schemes, and not hitting saving with more tax!
I think the real issue is the unfairness of NI. Deferral of tax on pension contributions is very reasonable and encourages saving for retirement especially when coupled with employer contributions. However, the age discrimination against the working population is not reasonable. NI is a tax not a contribution to a savings fund or a medical insurance, pensioners like me pay a lot less tax relatively than employed people who could well be repaying student loans at the same time. We should strive to overcome this unfairness even though it would hardly be a vote winner!
“The Office for Budget Responsibility projects that by the 2050s, there will be barely two working adults for every pensioner. If we undermine private saving now……”
If I understand the OP correctly, the implication is that a government run pension scheme is incapable of solving the problem but a private sector scheme will be.
There is going to be an equal problem for both. We can see this in the extreme that everyone retires at once. No one will be able to survive no matter how much money they have saved. They’ll only be able to do that if they have stocked on tins of soup and beans etc. But this is not what private pensions schemes are designed to do.
If anyone is unconvinced about this, Warren Mosler gives a more detailed rationale in the link below. See Deadly Innocent Fraud #4. Warren explains it in a US context but the principle is the same.
https://moslereconomics.com/mandatory-readings/innocent-frauds/
Any measure that encourages younger and less well off people to put money into a pension should be encouraged. Obviously such measures can also be used by those who are more wealthy. Implementing a means testing would avoid the rich taking advantage of this though would come with its own problems.