Rachel Reeves plots raid on middle-class pensions to pay for another welfare handout in this week’s Budget

Rachel Reeves is planning a new attack on middle-class pensions this week as she pushes to get another round of welfare benefits.

The Chancellor is aiming for a £3bn raid on ‘salary-sacrifice’ schemes used by millions of private sector workers to help fund left-wing demands to scrap the two-child benefit cap.

The move is reminiscent of the infamous pension raid during Gordon Brown’s last Labor government. Experts have warned this would deal a major blow to private sector pensions, which currently lag far behind gold-plated regulations in the public sector.

The tax grab is expected to cut many workers’ pensions by thousands of pounds, as cash-strapped businesses warn they won’t be able to plug the gap. According to the Confederation of British Industry (CBI), it is ‘a tax on doing the right thing’.

Former work and pensions minister Sir Iain Duncan Smith said the Government was destroying what was once the ‘largest pension system in the world’, adding: ‘This will deal a huge blow to savings. The biggest victims will be middle-income people trying to do the right thing.

‘Pension funds will pay less to their members, so less money will enter the economy. But they will also have less to invest and, given that they are some of the biggest investors in the economy, this will hurt the growth that the Chancellor says he is trying to achieve. This is very short-sighted, like Gordon Brown’s raid on pension funds.’

Former Bank of England chief economist Andy Haldane (pictured with Laura Kuenssberg on the BBC1 current affairs program on Sunday) said Britain could face a ‘vulnerable moment’ unless the Chancellor can convince financial markets he has his spending under control

Warnings about the latest retirement raid came as follows:

• CBI chief Rain Newton-Smith called for spending cuts in the Budget and told the Chancellor: ‘You will never be able to tax your way to growth.’
• Ms Reeves vowed to use the Budget to ‘bring inflation under control’, which has nearly doubled under Labour.
• The Treasury said rail charges would be frozen and the Chancellor was expected to help firms and families with their energy bills.
• Andy Haldane, former chief economist at the Bank of England, said Britain could face a ‘vulnerable moment’ unless the Chancellor can convince financial markets that he has his spending under control.
• A poll by the More In Common think tank found twice as many voters want the Government to cut spending rather than raise taxes.
• The Treasury said Ms Reeves would target a £1.2bn cut in benefit fraud and error.
• The Chancellor has confirmed that the state pension will increase by £550 next year as a result of Triple Lock.

Under salary-sacrifice schemes, workers accept a lower wage each month and their employers contribute an equivalent pension contribution. This reduces National Insurance liabilities, with companies and staff often splitting the savings.

The tax break was created to encourage retirement saving and costs the Treasury £4bn a year. Ms Reeves is considering limiting the ‘sacrificable’ salary to just £2,000, saving the Treasury around £2bn.

However, the Financial Times reported that the Treasury currently wants to make savings of between £3bn and £4bn and has suggested that this amount will be further reduced or cancelled.

It comes as Ms Reeves prepares to bow to demands from Labor MPs to scrap the two-child benefit limit, which would cost a similar amount – £3.5bn.

Treasury sources had said that the removal of the emission cap was effectively off the table this year. But it looks set to be scrapped in Wednesday’s budget, with Left-wing MPs threatening to sack Sir Keir Starmer and Ms Reeves if they do not change course.

Former pensions minister Sir Steve Webb said limiting pay cuts to £2,000 would hit ‘many working people who the Government says it wants to protect’.

Sir Steve, a partner at pensions consultancy LCP, said: ‘You can’t raise billions of dollars from this without hurting middle-income earners.’

Another pensions minister, Ros Altmann, said the proposals would cut people’s pensions and amount to a ‘stealth tax on employers’ who would incur huge administrative costs.

The CBI survey found that almost three-quarters of large firms cannot make up the shortfall in pension contributions.

The Sunday Times’ analysis of the LCP showed that public sector pensions are up to twice as generous as private sector pensions.

The average private sector worker can expect to get back £533.80 for every £100 invested over 20 years. But an NHS worker will receive £1,130.20, a civil servant £1,008.60 and a teacher £984.