RACHEL Reeves is said to be planning a raid on pensions to fund a major welfare shake-up.
Reports have suggested the Chancellor is set to cap the amount that workers can pay into salary sacrifice schemes at £2,000 – raising around £2billion for the Treasury.
But the Financial Times is reporting the Treasury could scrap the schemes altogether, raising between £3billion to £4billion.
But the Chancellor is said to be considering cutting back the scheme to pay for demands from Labour backbenchers to scrap the two-child benefit cap.
Treasury sources previously said removing the cap was effectively off the table, but left-wing MPs had threatened to oust Sir Keir Starmer and Ms Reeves unless they change course.
The policy currently limits Universal Credit and child tax credit for families to two children, but it’s expected this will be lifted in the Budget on Wednesday.
It’s expected the move will cost more than £3billion – roughly the same amount that scrapping salary sacrifice schemes would raise.
Salary sacrifice lets workers give up a portion of their pay packet in exchange for another benefit, such as leasing a car or joining a cycle-to-work scheme.
In many cases, workers use salary sacrifice to pay into their pension – and because that chunk of their pay isn’t subject to National Insurance (NI), both employees and employers save money in tax.
Many firms pass on the saving back to their staff by boosting their pension contributions at no extra cost to workers.
Experts are warning that cutting back on salary sacrifice schemes – effectively a raid on pensions – will hit middle-income earners in particular.
Former pensions minister and partner at pensions consultancy LCP Sir Steve Webb told the Daily Mail it would hit “a lot of the working people the Government says it wants to protect”.
Meanwhile, former Tory work and pensions secretary Sir Iain Duncan Smith said the Government was destroying what used to be “the greatest pension system in the world”.
“This will be a huge hit on savings. The biggest victims will be middle-income earners who are trying to do the right thing,” he said.
“The pension funds will pay out less to their members, so there will be less money going into the economy.
“But they will also have less to invest, and given that they are some of the biggest investors in the economy that is going to damage the growth the Chancellor says she is trying to achieve.”
The Sun has reached out to the Treasury for comment.
How the plans could affect you
If the plans go ahead, workers won’t be able to save as much tax-free into salary sacrifice schemes.
They would be forced to pay the full rate of National Insurance on any contributions they make over just £2,000 a year.
A worker earning £50,270 a year paying in 6% of their salary would suddenly be £80 a year worse off.
If that same worker is saving 10%, they’d be forced to handover an extra £240 in National Insurance every year.
While losing a few hundred pounds a year is bad enough, the real damage is to your long-term retirement savings.
Analysis from pensions experts at AJ Bell reveals the long-term cost of a potential salary sacrifice cap.
They looked at a typical 35-year-old saver, starting with £30,000 in their pot and saving for 30 years with their employer.
A worker on a £40,000 salary would see their final pension pot slashed by £20,101.
For someone on £50,000, the gap is a whopping £22,060.
And the more you earn, the more you lose.
Higher earners on £100,000 face a £49,682 black hole in their savings.
Meanwhile, a Confederation of British Industry poll has found almost three-quarters of big firms would not make up the shortfall in pension contributions.
What is the two-child benefit cap?
AS we’ve mentioned, the reported raid on salary sacrifice schemes is aimed at paying for scrapping the two-child benefit cap. Here’s what you need to know about the welfare handout.
Rachel Reeves is rumoured to be axing the two-child benefit cap in the Autumn Budget on Wednesday.
The policy limits Universal Credit and child tax credit for families to two children.
It applies to third or subsequent children born after 6 April 2017.
For example, if you’re already claiming Universal Credit, and have two children and you then give birth to a new child, you won’t get an additional amount of Universal Credit for that new child.
There are exemptions such as if parents have one child, and the next are twins or triplets or the child is likely to have been born as a result of rape.
The cap currently stops families claiming £292.81-a-month Universal Credit for the third child or any others born after this date.
Axing it would see the biggest families claiming support get more than £18,000 a year.
Scrapping the measure would also lift 350,000 children out of poverty and mean 700,000 children are in less deep poverty, according to Child Action Poverty Group.
The Chancellor is expected to bow to pressure to scrap the controversial policy altogether.
More measures that could be announced this week
The Chancellor will set out her Budget plans in just two days.
Nothing has been confirmed so far, but rumours have been swirling for months.
One measure expected to be announced is a further freeze on income tax thresholds until 2030.
This means when your pay rises, more of it can be taxed at higher rates even though the bands do not change – an effect known as fiscal drag.
It means millions of workers will end up paying more in tax – while 9.3million pensioners will also start paying.
At the same time, the Chancellor is due to announce a bumper state pension increase in her Budget next week.
The rate of the full new state pension is now expected to increase to just over £240 a week – or £12,534.60.
