Rachel Reeves has been urged to U-turn on a pensions tax raid plan. The Chancellor wants salary-sacrificed pension contributions above an annual £2,000 threshold to no longer be exempt from National Insurance (NI) from April 2029.

Salary sacrifice allows people to relinquish a portion of their gross salary in return for benefits, including pension contributions. The money is taken from workers’ pay packets before it is subject to NI or Income Tax. Up to £60,000 per year can be paid into pension schemes in this way. Nigel Green, CEO of finance firm deVere Group, said: “The pension tax grab is getting closer and closer to becoming law. This proposal is both economically short-sighted and socially counterproductive.”

He added: “At a time when the government’s own pensions review has acknowledged that millions of Britons are not saving enough, ministers are pressing ahead with a measure that actively discourages disciplined, long-term retirement planning.”

His comments came as peers hammered the proposal in the House of Lords on Thursday (March 5). They inflicted a string of defeats against the National Insurance Contributions (Employer Pensions Contributions) Bill.

Changes to the Bill backed by peers included Tory amendments to exempt basic rate taxpayers from the proposed £2,000 cap and a move to prevent graduates being unfairly “punished”, by excluding salary-sacrificed pension contributions over the limit from student loan repayment calculations.

The Lords also supported a Liberal Democrat proposal to hike the threshold from £2,000 to £5,000, and a Conservative measure to exempt small and medium-sized businesses and charities from the provisions of the Bill.

In addition, the upper chamber demanded strengthened parliamentary scrutiny over the operation of the reform.

Analysis by the consultancy, LCP, cited by The Times, shows the Chancellor’s plan would see a worker earning £52,000 per year who makes a 10% contribution to their pension through salary sacrifice would pay an extra £256 in NI annually.

The Government has said 3.3 million of the 7.7 million workers who take advantage of salary sacrifice contribute over £2,000 annually would be directly affected by the changes.

Mr Green warned many employers will scale back pension generosity, moderate pay awards, or abandon salary sacrifice arrangements entirely as a result of the Chancellor’s move. He said: “The impact will ripple far beyond those immediately breaching the threshold.”

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Nouran Moustafa, Practice Principal at Roxton Wealth, told the Daily Express capping NI risks sending the wrong message.

She said: “For years, governments have encouraged people to save more for retirement to reduce long term reliance on the state. Introducing a cap like this effectively penalises disciplined savers and employers who structured remuneration responsibly.

“Over time, this could remove tens of thousands of pounds from retirement pots through lost compounding and that’s before you consider the behavioural impact. If incentives weaken, participation drops.”

Ms Moustafa warned employers may scale back salary sacrifice schemes altogether, increasing payroll costs and reducing pension engagement.

She added: “The Government should think carefully before undermining one of the most effective workplace savings mechanisms we have.”

Kate Underwood, Founder of Kate Underwood HR and Training, urged the Chancellor to U-turn. She said: “This cap basically says ‘save more, and we’ll charge you more NI for the privilege’.”

Ms Underwood added: “Plenty of SMEs use salary sacrifice as the grown-up way to fund decent pensions without constant pay battles.

“Whack extra NI on top and guess what happens? Employers scale back. Schemes get binned. Staff take home less. Trust drops.”

Rohit Parmar-Mistry from Pattrn Data urged the Chancellor to adopt a tapered approach, publish clear rules up front and protect genuine retirement saving. He added: “Otherwise this becomes stealth tax plus a savings disincentive, dressed up as reform.”

Rob Mansfield, an Independent Financial Adviser from Rootes Wealth Management, said he hoped the Lords would make their case and force the Government to think again.

He said: “It’s in everyone’s interests for people to contribute to a pension to create a healthy savings culture and reduce the burden on the state in years to come. The constant tinkering and faffing with rules, risks putting people off.”

Labour peer Lord Davies of Brixton told peers a £2,000 salary sacrifice limit was “an entirely reasonable approach”.

He said: “We have to draw up a fair judgment on where and how far tax incentives to encourage people to save for retirement should go.”

Arguing the impact on basic rate taxpayers was “marginal”, Lord Davies added: “It does annoy me that so much emphasis is placed on something which is essentially a side-show to the important questions of pension provision that we are going to have to address.”

Lord Davies also pointed out that pension salary sacrifice was not available to employees in the public sector.