Nearly three million workers in the United Kingdom are expected to save less for retirement following recent government changes to pension tax breaks, according to official data obtained through a Freedom of Information request. The Treasury’s reforms, aimed at curbing what it describes as a tax advantage mainly benefiting higher earners, will introduce a cap on contributions made through workplace “salary sacrifice” pension schemes, effectively reducing the tax relief available on some pension top-ups.

The policy, announced by Chancellor Rachel Reeves in her second Budget, will limit the amount workers can pay into their pensions via salary sacrifice schemes to £2,000 annually before contributions become liable for National Insurance (NI) contributions. These salary sacrifice arrangements allow employees to exchange part of their salary for tax-free pension contributions, which also reduces employers’ NI liabilities. The Treasury estimates that these changes could generate £4 billion in additional tax revenue by the end of the decade.

Data from HM Revenue and Customs (HMRC) reveals that out of 2.9 million affected workers, approximately 666,000 are basic-rate taxpayers earning less than £50,271 annually. This challenges assertions that the measures primarily target high earners. The Office for Budget Responsibility (OBR) further projects that the majority of the additional tax burden—approximately £3 billion in 2029-30—will fall on employers in the form of increased NI contributions. Employers are expected to absorb much of the cost, potentially influencing pay rise decisions.

Critics of the policy argue that the reforms could hinder efforts to encourage pension saving at a time when under-saving is already a significant concern. Sir Steve Webb, former pensions minister and current partner at consultancy LCP, described the impact as "far more damaging than had previously been admitted." He emphasized that the policy risks reducing pension contributions for millions, including many moderate earners, despite government initiatives aiming to address pension under-saving nationwide. Webb also highlighted the apparent contradiction between government efforts to promote increased retirement savings and simultaneously implementing changes that may discourage them.

Separate analysis from the Institute for Fiscal Studies (IFS) warned that around one million households could see their disposable income decrease by nearly £900 annually due to the reforms. Businesses may partially respond to increased costs by limiting employee pay growth.

The Treasury defended the reforms as a move to eliminate an unfair tax break disproportionately benefiting wealthier individuals. A Treasury spokesperson stated that 95% of salary sacrifice users earning under £30,000 will be unaffected and highlighted that more than three-quarters of workers under 30 will not see changes. The government framed the changes as part of broader efforts to ensure tax reliefs are fair and sustainable amid concerns over the public finances.

This pension reform comes amid wider concerns about pension adequacy in the UK. A recent landmark review found that 15 million people are currently saving insufficiently for retirement, with middle earners, women, and the self-employed identified as particularly vulnerable groups. The new restrictions on salary sacrifice pension contributions add complexity to the challenge of improving long-term retirement savings for many workers.