Rachel Reeves slammed 'reckless' as she plots NEW £4billion tax raid on pension perks

Chancellor Rachel Reeves faces mounting pressure over proposals for a pension tax reform that could generate up to £4billion for the Treasury whilst imposing significant costs on ordinary workers in her upcoming Budget.

The Chancellor is said to be looking at cutting back the tax breaks workers and employers get when they pay into workplace pensions, a change that could leave the average employee around £210 worse off each year.

The move would focus on 'salary sacrifice' schemes, which allows people to put money into their pension before income tax or National Insurance is deducted from their pay.

Treasury sources say the changes would mainly hit higher earners, but pension experts warn that more than 3 million basic-rate taxpayers could also end up paying more.

The shadow chancellor has branded the plans "reckless" and said Ms Reeves should resign if she pushes ahead. The row comes as the Chancellor prepares for her November 26 Budget, after promising that any tax rises would fall on Britain’s wealthiest.

Salary sacrifice schemes let workers boost their pension savings in a tax-efficient way while helping employers save on National Insurance, since contributions are based only on what’s left of a person’s salary after pension deductions.

Under Ms Reeves' plans, limits would be introduced on how much can be paid into pensions before tax kicks in. HMRC has confirmed it is looking at ways to scale back the generous tax perks linked to these schemes.

Treasury officials have also noted that big companies benefit the most from these National Insurance savings, as they have the resources to manage the extra admin these schemes require.

Government data indicates that over 75 per cent of income tax advantages from these pension arrangements flow to those paying higher and additional tax rates.

Sir Mel Stride, the shadow chancellor, has launched a fierce attack on the proposals, declaring: "If Rachel Reeves really is planning to cap salary sacrifice relief, it's another reckless hit on business and jobs."

He warned that implementing such measures would constitute a betrayal of previous commitments, stating: "Starmer and Reeves promised no more tax rises after their disastrous Budget last year if they break their word again, the Chancellor has to go."

The opposition’s reaction has fuelled political tension over the government’s tax plans, with critics warning the move would hurt both businesses and ordinary workers.

The backlash piles further pressure on Rachel Reeves, who has repeatedly insisted that those with the "broadest shoulders" will carry the biggest share of the tax burden.

Financial experts estimate that a worker earning £35,000 a year and putting five per cent of their salary into a pension could end up paying an extra £210 in National Insurance if the current tax breaks were scrapped. Employers matching those contributions would also see their costs rise by around £242.

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Pension consultancy LCP warns that scrapping salary sacrifice altogether would hit more than three million basic-rate taxpayers. One option reportedly being discussed is to introduce a £2,000 yearly cap on tax-free pension contributions.

This would help protect most workers and employers from paying extra National Insurance on pension savings. HMRC analysis suggests the impact on middle earners would be small, with someone on £45,000 paying about £30 more a year, while their employer would pay around £34 extra.

Sir Steve Webb, a former pensions minister and LCP partner, cautioned that abolishing the scheme would "penalise the best employers and make it less attractive to offer decent pensions."

He suggested a more moderate approach: "A more modest reform would be to cap the amount which can be sacrificed, and HMRC have tested employer opinion on this option as well."

Pension specialists have raised alarms about the timing, given widespread concerns that employees are already failing to save adequately for retirement.

The reforms have garnered support from various policy institutes, including the Resolution Foundation and the Institute for Fiscal Studies.

Previous governments restricted these schemes in 2017 when Philip Hammond eliminated tax-free benefits for gym memberships and shopping vouchers.

A Treasury spokesman declined to address the reports, stating: "We do not comment on speculation around changes to tax outside of fiscal events."