The Chancellor has capped the tax benefits of salary sacrifice schemes at a new threshold of £2,000, above which pension contributions will incur national insurance.
Under the current rules, employees can put up to £60,000 a year into their pension through salary sacrifice. They get tax relief at their usual income tax rate, and neither they nor their employer pay national insurance on these contributions.
In today's Budget, Reeves has announced that contributions above an annual £2,000 threshold will no longer be exempt from national insurance contributions from April 2029.
Modelling released by the OBR today estimate this will raise £4.7bn in 2029-30 and £2.6bn in 2030-31.
Recent research from the ABI shows that two in five (38%) savers say they would cut back on pension contributions if salary sacrifice is capped – putting millions at risk of poorer retirements.
In addition, nearly half (42%) of employers that pay staff more than the minimum pension would consider reducing their contributions if National Insurance was introduced on employer pension payments.
David Brooks, head of policy at financial services consultancy Broadstone, commented: “The £2,000 cap on salary sacrifice is a classic case of government departments not joining the dots.
“On one hand, the Pension Schemes Bill is packed with positive reforms: fewer schemes, larger asset pools, a unified value-for-money framework, and better support for savers both during the accumulation phase and as they transition into retirement.
“But this salary sacrifice change risks undermining that progress.
“It hits the pension growth phase directly. People will feel poorer and many will reduce their contributions. Inertia might help some stay the course, but others, especially those aiming to save enough for a decent retirement, may scale back. Employers will also feel the pinch.
“Lower earners and those on auto-enrolment minimums may not notice much. But anyone contributing meaningfully, often encouraged by planners and policy alike, will.”
Claire Trott, head of advice at St. James’s Place, said: “Salary sacrifice for pensions is one of the few remaining and most effective ways to help people save for retirement. By passing on National Insurance savings, it makes contributing easier and more affordable for both employers and employees.
“However, adding limits or extra monitoring risks creating confusion and deterring savers. If people fear getting it wrong or see their take-home pay fluctuate, many could opt out altogether. Tinkering with long-standing savings systems rarely ends well - any changes must be simple, clear and fair for everyone.”
Gary Smith, senior partner and retirement specialist at wealth management firm Evelyn Partners, added: "This cap throws a spanner into the works of private sector pensions, where salary sacrifice is a crucial and valued feature of workplace schemes. At £4.7billion, the tax take is greater than expected and means the impact of this policy on pensions, pay or businesses – or all three – could be severe. Research earlier this year suggested that about 48% of all UK private sector companies offer salary sacrifice pension contribution systems, but at larger firms it was about 67%, and up to 85% for biggest employers.
"Restricting salary sacrifice is a tax penalty on people trying to the right thing by saving efficiently for their own retirement and it’s yet another National Insurance cost increase imposed on firms, which may result in reduced pay and pension benefits for private sector employees. Some employers who currently pay more than the auto-enrolment minimum on behalf of their employees will be inclined to reduce their contribution rates or other employee benefits to adjust for these changes.
"Under the current minimum auto-enrolment scheme percentage contribution rates, someone earning less than £40,000 a year will not be affected by these changes.
"For those who earn more, it will depend on how firms react and how they manage their pension systems. It could be that many white-collar workers will just see their monthly NI bill go up and take-home pay go down if they study their payslip.
"An individual earning £100k a year could have £393 a year less paid into their pension, if the employer based the contributions on 100% of salary and gave all of the NI saving back to the employee. For someone earning £200k, the figure rises to £708 less being paid into the pension. But if some contributions are done by salary sacrifice, and the rest not – will some firms just switch to a net pay system for instance?"
