Chancellor ‘plots raid on middle class pensions’ and will unveil £15bn extra spending on welfare

Salary sacrifice schemes allow workers to give up a portion of their regular pay in return for a different benefit, such as pension contributions.

This cuts their National Insurance (NI) liability, bringing tax advantages for employees and for employers as both benefit from the saving.

The Chancellor is understood to be targeting a £3billion raid on the scheme, which is used by millions of private-sector workers.

She is considering limiting the NI relief for staff and employers to contributions under £2,000 - meaning higher earners making large contributions to their pensions through salary sacrifice would be hit the hardest.

But critics say this will slash the pension pots of many workers by thousands of pounds.

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Dan Neidle, from the Tax Policy Associates, said: “It’s hard to defend a tax system that can mean people lose money if they work more hours.

“Right now many people deal with this through salary sacrifice. If salary sacrifice were abolished then we could see some quite serious effects.”

Former work and pensions secretary Sir Iain Duncan Smith said it will be a “huge hit on savings”.

“The biggest victims will be middle-income earners who are trying to do the right thing.”

Ms Reeves has also been warned cash-strapped businesses will struggle to make up for the shortfall.

The Confederation of British Industry (CBI) has branded it “a tax on doing the right thing”.

Pensions UK and the Federation of Small Businesses (FSB) warned last week the clampdown risks damaging public confidence in the pensions system and undermining economic growth.

The groups, which represent the pensions industry and businesses, warn speculation alone over potential changes is already eroding saver confidence, with increases in inquiries from savers and the potential for people making unnecessary early pension withdrawals.

Ms Reeves has also been warned pensioners could be £800 worse off if she extends the income tax threshold freeze in the Budget. It is believed the Chancellor will extend the measure by another two years to 2030.

But she has been told this could cost pensioners around £7 billion a year in 2029 and 2030, research by the House of Commons Library suggests.

Dennis Reed, director of over-60s group Silver Voices, said: "This smash and grab tax hike on pensioners must be stopped.

"If Rachel Reeves's plans are enacted in the Budget an extra £14 billion a year will be burgled from pensioners' pockets by 2030, money that should be used to meet rising energy and food costs and to help grow the economy."Make no mistake, extending the freeze on lower tax thresholds is a major breach of the Labour manifesto, where no increases in income tax were promised.

"Freezing allowances is the same as raising income tax rates in terms of the effect on standards of living. Much of the £800 a year tax hit on older people will come from taxing the state pension and any triple lock increases, making a mockery of the formula to prevent rises in pensioner poverty."

The research, commissioned by the Liberal Democrats, found that pensioners have lost £41 billion since the tax threshold freeze was brought in by the Conservatives in 2023. However, Ms Reeves is also expected to announce in the Budget on Wednesday that around 13 million pensioners will receive a higher-than-inflation £500 boost each year.

Brits on the full rate of the new state pension will see more than £550 a year more as a result of the Chancellor’s measure.

Ms Reeves said: "Whether it's our commitment to the triple lock or to rebuilding our NHS to cut waiting lists, we're supporting pensioners to give them the security in retirement they deserve.

“At the budget this week I will set out how we will take the fair choices to deliver on the country's priorities to cut NHS waiting lists, cut national debt, and cut the cost of living.”

It is also understood that Ms Reeves plans to unveil £15bn of extra benefits spending in this week’s Budget, funded by a tax raid on the middle classes.

She will reportedly scrap the two-child benefit cap entirely and  increase benefit payments by nearly 4 per cent, while financing about-turns on winter fuel cuts and welfare reform.

She will also drag an estimated nine million people into paying higher rates of income tax by freezing thresholds. The annual cost of the four policies comes to £15bn.

Mel Stride, the Conservative shadow chancellor, warned: “Who will pick up the bill? Hard-working families.”

The Chancellor will unveil a series of tax rises this as she aims to fill a black hole in the public finances of up to £30bn from deteriorating economic forecasts.