Workers could lose £560 each year in HMRC tax loophole change | Personal Finance | Finance

The government has published radical proposals to change pension payments that will see workers hit with an extra £560 of taxes if taken forwards.

Right now, UK workers can take advantage of a huge tax relief on contributions to their pension. By sacrificing salary into their private workplace pension pot, employees can legally avoid tax on their wages. Instead of being taxed 20%, 40% or even 45% of their earnings, any money ‘salary sacrificed’ into their pension is not taxed or subject to National Insurance and, when withdrawn later in life there are ways to access the money tax-free instead, again with no National Insurance payable.

But research paid for by HMRC in a report titled ‘Understanding the Attitudes and Behaviours of Employers Towards Salary Sacrifice for Pensions’ revealed that the advantages could potentially be removed in future.

The report, undertaken out by the previous government in 2023 but published this week, asked more than 50 firms to comment on possible changes to salary sacrifice schemes.

One such change included removing the National Insurance exemption for employers and employees, meaning workers and their employers would have to pay National Insurance tax on the salary sacrificed.

Another option was that the National Insurance exemption and the income tax exemption would both be removed for employees on salary sacrificed, which would leave average workers £560 a year worse off.

The report said: “The second scenario removed the NI exemption for employers and employees, and the income tax exemption for employees, on the salary sacrificed. Consequently, compared to the baseline arrangement, the employer would pay an additional £242 in NI and the employee would pay an additional £560 in combined National Insurance and income tax per year when using salary sacrifice for pensions.”

Finally, a third option was to remove the National Insurance exemption but only for amounts above £2,000 a year.

If the plans to remove both income tax and National Insurance exemption for salary sacrifice were taken forwards, it would cost a worker on £35,000 a year £560, according to HMRC.

The option removing only National Insurance exemption would cost £210, and the £2,000 threshold would cost the worker £30.

HMRC’s report concluded: “All the hypothetical scenarios explored in this research were viewed negatively by employers, but the extent to which they led to a reported definitive change in employer behaviour regarding pensions varied…Generally, employers indicated that changing the pension system could inevitably cause confusion and risk people becoming more disengaged with pensions.”

Right now, the ability to salary sacrifice can be very lucrative. Money Saving Expert Martin Lewis explained on an episode of his ITV show how paying into your pension can ‘double or nearly treble’ your money and is in effect like giving yourself a payrise.