Was this the worst budget I have seen in a working lifetime reporting on these fiscal pantomimes? The reason I ask is that it will hit low-paid and young people hardest of all with stealth taxes that sacrifice small savers\u2019 long-term retirement dreams to solve big government\u2019s short-term cash crunch nightmare.<\/p>\n
Lest this sound like a party political point, I had better say straight away that Rachel Reeves\u2019s latest effort is up against stiff competition after several damaging budgets in the last 40 years. I remember the dire consequences for homebuyers from the Conservative chancellor Nigel Lawson\u2019s 1988 budget, which was popular on the day. Also, the Labour chancellor Gordon Brown\u2019s concealed tax raid in 1997 helped turn company pension surpluses into deficits, although few people understood that at the time.<\/p>\n
The less that is said about Kwasi Kwarteng\u2019s brief tenure at Number 11 Downing Street between early September and mid-October 2022, the better.<\/p>\n
Here and now, you could be forgiven for failing to recognise the significance of Reeves\u2019s restrictions on salary sacrifice \u2014 an agreement to give up some pay today, and avoiding tax on it in the process, to boost retirement income tomorrow. In total more than \u00a34 billion of tax is avoided in this way each year. Whether we know it or not, this will hit private sector pensions, leaving public sector schemes subsidised by taxpayers largely untouched.<\/p>\n
Hidden behind complex jargon, the simple fact is this budget will extend pensions apartheid \u2014separate systems for government employees and the rest of us \u2014 to an extent never contemplated by Brown. Few of the MPs cheering on Reeves will be affected because defined benefit public sector pensions rarely offer salary sacrifice, unlike the defined contribution private sector schemes used by most of their constituents.<\/p>\n
There\u2019s no need to take my word for this. Steve Hitchiner from the Society of Pensions Professionals, a trade body, told me: \u201cRestricting salary sacrifice will affect millions of employees \u2014 especially basic-rate taxpayers \u2014 and is a tax on working people, in spirit if not in name. Perhaps most importantly, it will reduce pension saving.\u201d<\/p>\n
\u2022 Read more money advice and tips on investing from our experts<\/a><\/p>\n Before your eyes glaze over, consider calculations by the pension company Scottish Widows that show a 26-year-old earning the average full-time salary of \u00a337,430 a year will retire with a pension pot worth \u00a332,000 less because of Reeves\u2019s tax raid. This is because the amount that can be paid in via salary sacrifice while avoiding national insurance contributions will be capped at \u00a32,000 from April 2029.<\/p>\n Scottish Widows assumed they pay in the auto-enrolment minimum of 5 per cent (plus 3 per cent from their employer) and get modest pay rises and investment growth over their working life.<\/p>\n Parents earning \u00a360,000 a year or more, the point at which child benefit starts to be clawed back, and anyone earning more than \u00a3100,000, where the tax-free personal allowance begins to be withdrawn, are among other collateral casualties.<\/p>\n \u2022 Pension tax raid will raise \u2018a fraction\u2019 of what Rachel Reeves expects<\/a><\/p>\n The Institute of Chartered Accountants in England and Wales said about a third of private sector workers use salary sacrifice, including parents and high earners who do so to reduce their taxable income below these thresholds.<\/p>\n Adelle Greenwood from the trade body said: \u201cThese employees will need to consider how the changes impact on their wider tax and national insurance position. Also, basic-rate taxpayers may question the fairness of the measure as they face national insurance at 8 per cent, compared with 2 per cent for higher paid employees.\u201d<\/p>\n Hitchiner said: \u201cThis will also affect thousands of employers given employer national insurance is charged at 15 per cent on all earnings above \u00a35,000 a year. About 90 per cent of employers offer salary sacrifice.\u201d<\/p>\n Employees\u2019 national insurance contributions are income tax by another name and employers\u2019 contributions are a tax on jobs. The system is designed to be complex because, if it was less confusing, more people might realise how deep the government has its arm in our pockets.<\/p>\n