Salary sacrifice tax break cut on workplace pensions

Some pension savers will face a hit to the amount of money they can put into their pension without paying national insurance (NI), under measures announced in the Budget.

From 2029, there will be a cap of £2,000 per year that can be shielded from employer and employee NI contributions by using a method called salary sacrifice.

There is currently a much higher limit to the amount a worker can agree their employer to pay in, with the scheme seen as a way to encourage workers to pay into their pensions.

The measure will raise £4.7bn in extra NI contributions in 2029, the Office for Budget Responsibility (OBR) has estimated.

Salary sacrifice lets workers and employers agree an amount to be taken out of pay and shifted into a pension before the salary is hit by National Insurance Contributions (NICs) and income tax. Workers "sacrifice" a higher salary, but receive a tax-free sum into their pot, with each pay cheque.

Chancellor Rachel Reeves said the current system favoured high-income earners and those who work in financial services, "who can put their bonuses into pensions tax-free".

The £2,000 cap on salary sacrifice was a "pragmatic step" Reeves said, and would mean low-and-middle income earners could continue to use the scheme "without paying any more in tax".

The salary sacrifice policy also reduces the overall amount of employer National Insurance Contributions (NICs) that companies pay, so any cap will mean a higher NICs bill for companies or a rethink on whether they offer the perk.

About a third of private sector employees and a 10th of public sector workers use a salary sacrifice scheme for their pension savings. Analysis by HM Revenues & Customs suggested about 7.7 million employees used it in 2024.

Former pensions minister Steve Webb, now partner at LCP, said that the time until National Insurance payments are due on salary sacrifice, more than three years away, means it is unlikely the chancellor will raise the £4.7bn the OBR estimates.

"The decision not to implement this change until 2029 creates a huge opportunity for firms to restructure the way that they offer pay and pensions in order to mitigate or eliminate this new charge," Mr Webb said.

"There is a high probability that this policy will only raise a fraction of the amount expected by the chancellor."