Chancellor of the Exchequer Rachel Reeves has unveiled a significant shift in pension taxation in her second budget, a move set to impact millions of UK workers. The key change targets the popular salary sacrifice schemes used by many to build their retirement pot.
Understanding the New Pension Cap
From April 2029, individuals using salary sacrifice to pay into their pension will be required to pay National Insurance contributions (NICs) on any amount exceeding £2,000. The Treasury estimates this adjustment could affect around 7.7 million people, representing approximately 20% of the employed adult population.
Antonia Medlicott, founder and Managing Director of finance education specialists Investing Insiders, cautions against a hasty reaction. Instead, she offers three strategic tips for those concerned about the implications for their financial future.
1. Don't Abandon Salary Sacrifice Prematurely
Medlicott strongly advises against ditching salary sacrifice arrangements for now. "Firstly, around 75 per cent of people who use salary sacrifice won’t be affected by this cap," she explains. "It’s targeted at high earners." For someone on the average UK salary of £37,000, contributing 5% annually would still keep them safely below the £2,000 threshold.
"Secondly, the cap isn’t a cap on contributions, just on how much can be contributed without needing to pay NICs," she adds. Crucially, the rule does not take effect until 2029, leaving several years to maximise the scheme's current benefits. The standard annual pension allowance remains £60,000, or 100% of earnings if lower, with potential for higher contributions using unused allowances from the previous three years.
2. Remember Workplace Pensions Remain a Smart Choice
It is vital to distinguish between different pension types. "There is nothing changing in the treatment of the contributions made through personal pensions, or workplace pensions after tax has already been taken from your payslip," Antonia clarifies. Salary sacrifice is a specific, optional scheme offered by some employers.
For standard workplace or personal pension contributions, full income-tax relief continues unchanged. While National Insurance relief is exclusive to salary sacrifice, workplace pensions remain highly beneficial due to mandatory employer contributions.
3. Explore Other Ways to Reduce Taxable Income
Many use salary sacrifice to lower their taxable income, avoiding thresholds like the Child Benefit taper at £60,000 or the Personal Allowance reduction at £100,000. "If pension contributions have been the main strategy... you may have to look at other ways," Medlicott states.
Several other employer schemes will remain fully exempt from both income tax and NICs. According to current understanding, these include:
- Workplace nursery schemes
- Subsidised canteen meals
- Cycle to Work schemes
- Employer-provided childcare vouchers (for existing members)
Electric vehicle schemes, while taxed as a benefit-in-kind, also offer very low government-set tax rates, making them a potential alternative.
Antonia Medlicott's final advice is to plan ahead: "There are more than three years until this change comes into effect. Planning now could mean you don’t lose out later on." Proactive review of your financial strategy is key to navigating this upcoming change.
