Pension salary sacrifice schemes are set to be restricted from April 2029, with contributions above an annual £2,000 threshold no longer exempt from National Insurance contributions. The changes were announced by former Chancellor Rachel Reeves in last year’s Budget.
A salary sacrifice scheme is an arrangement between employers and employees which sees workers give up part of their salary in exchange for benefits, such as pension contributions. This results in lower National Insurance and income tax payments for both, and sees employers redirect the sacrificed salary amount into an employee’s workplace pension, allowing workers to save money on tax and increase their pension savings.
What the changes mean
From April 2029, salary sacrifices are to be scaled back to recoup some of the tax revenue lost through these schemes. The major reforms will see salary sacrifice contributions to pensions have National Insurance relief removed after the first £2,000, meaning both employers and employees will pay National Insurance on any amount above the £2,000 cap.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “From April 2029, a new limit on how much you can contribute to a pension under salary sacrifice and benefit from National Insurance (NI) savings will be introduced. Employee contributions of more than £2,000 per year will keep income tax savings but will be subject to NI for both employers and employees.”
Impact on taxpayers
Morrissey added: “The rationale behind the change is that benefits of salary sacrifice were overwhelmingly enjoyed by higher earners. The Budget documents said that the limit would shield 74% of basic rate taxpayers.”
She noted: “The challenge is while the limit might offer protection for many workers contributing at auto-enrolment minimums, it could disincentivise them from boosting their contributions beyond that level – especially if it means they breach the £2,000 limit and start to miss out on NI savings. Higher earners will also see an impact as their contributions will breach £2,000 per year. Longer term there could be wider impacts. Employers will need to pay 15% of NI on employee contributions over £2,000. It’s a further squeeze in costs that could lead them to restrict wage increases in future which will impact people’s resilience both in the present and the future.”
Government response
Treasury minister Lord Livermore told peers earlier this year the plans are “fair and balanced reforms” which give employers many years to prepare. He said: “The £2,000 cap means that 74% of basic rate taxpayers who use salary sacrifice will be entirely unaffected by these changes. The remaining proportion of basic rate taxpayers who do have contributions above the cap will still be getting national insurance contributions relief of the first £2,000 made via salary sacrifice, in addition to the full income tax relief that is available to all employee pension contributions.”
As the changes aren’t due to come into effect until April 2029, it gives workers plenty of time to maximise their contributions until then to make the most of the current system and take advantage of the savings before the £2,000 cap is introduced.
