A £5 billion tax raid on salary sacrifice pension schemes announced in Rachel Reeves’s Budget has emerged as the single most damaging policy for business confidence, according to new research from the Confederation of British Industry.
Almost three-quarters (73%) of companies surveyed by the CBI said the move to levy national insurance contributions on pension salary sacrifice above a new cap was the most harmful measure in the Budget, warning it risks deterring workers from saving for retirement and disproportionately hitting middle earners.
The survey of more than 100 businesses and trade bodies found the mood across the corporate sector remains bleak following the Chancellor’s fiscal package. Some 84% of respondents said the Budget would not help lower the cost of doing business, while 62% said it would fail to boost confidence to innovate or invest for growth.
Business leaders are particularly concerned about the cumulative impact of policy changes, including higher business rates, above-inflation increases to the minimum wage, and rising employer national insurance costs. Together, they argue, these measures are squeezing margins at a time when firms are already grappling with weak demand and economic uncertainty.
Under the current system, salary sacrifice arrangements allow employees to reduce their taxable income by paying pension contributions directly from their salary, lowering both income tax and national insurance. Employers also benefit by paying national insurance only on the reduced salary, often enabling them to offer more generous pension contributions.
From 2029, however, the Chancellor’s reforms will cap salary sacrifice pension contributions at £2,000 a year. Any contributions above that level will attract employee national insurance at 8% on earnings below £50,268 and 2% above that threshold, while employers will pay full employer NICs at 15%.
The Treasury estimates the measure will raise £4.8 billion in its first year. Its own impact assessment suggests that around 3.3 million people currently sacrifice more than £2,000 a year into their pensions and will therefore face higher national insurance bills.
Businesses warn that the additional cost burden will inevitably feed through into lower employer pension contributions. The CBI has previously calculated that even a modest reduction in employer contributions could significantly erode retirement savings over time. A 22-year-old man on median earnings, contributing 9% of pay into a pension, could see his retirement pot shrink by nearly £25,000 if employer contributions were cut by just one percentage point.
Respondents to the CBI survey were blunt in their assessments. A professional services firm described the cap as an indirect tax on pensions, while a London-based service company said it would affect a “huge number of middle earners”. A construction business in the North of England warned the policy would almost certainly force firms to scale back employer pension contributions.
Louise Hellem, chief economist at the CBI, said the policy risks storing up long-term problems for both households and the public finances. “People are already saving far too little for retirement,” she said. “While this may boost Treasury revenues in the short term, it risks leaving future governments with retirees less able to fund a comfortable lifestyle or their own care.”
She added that, combined with higher national insurance and wage costs, the measure further penalises employment and reduces firms’ capacity to invest. “At a time when we need economy-wide growth to pick up, this is another headwind holding businesses back.”
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Budget tax raid on salary sacrifice schemes rattles business confidence
