Almost 2.9 million people are expected to slash their pension contributions when new salary sacrifice rules come into force in April 2029. The changes introduce a £2,000 yearly cap on how much can be saved into a pension through salary sacrifice schemes.
Salary sacrifice allows employees to exchange part of their pre-tax salary for non-cash benefits, such as pension contributions. This lowers gross salary, reducing income tax and National Insurance payments for both employees and employers.
Data obtained by former pensions minister Steve Webb via a Freedom of Information request to HMRC reveals the scale of the impact. Among those planning to cut back, 666,000 are basic rate taxpayers earning less than £50,271 annually. Separate analysis by the Institute for Fiscal Studies estimates one million households could be nearly £900 a year worse off.
The warning comes as the Pensions Commission reviews under-saving, noting 15 million people are not saving enough for retirement.
Webb criticised the policy, stating: “The Government has presented the changes as a relatively painless way of cracking down on a tax break mostly enjoyed by the well off. But these figures show the effects will be far more damaging than previously admitted.”
He added: “At a time when the Government is running a major Commission to tackle pension under-saving, it is shocking that a separate policy will result in over 2.8 million workers cutting back on pension saving. Nearly one in four of these are basic-rate taxpayers. It is hardly ‘joined-up government’ to stress the need for more pension saving one day and then implement a policy that will reduce savings the next.”
A Treasury spokesperson said: “High earners piled in huge bonuses through salary sacrifice without paying a penny in tax – a taxpayer funded perk largely benefitting the better off. Our fair reforms protect 95% of workers earning under £30,000 using salary sacrifice, and as IFS analysis shows, over three quarters of under 30s will be unaffected.”
