HMRC has issued an April 2029 deadline as pension savers are urged to act, with 2.8 million people affected. Workers are being advised to 'max out' contributions ahead of the clampdown on salary sacrifice.
Salary sacrifice allows employers and employees to save tax by giving up part of their salary in return for benefits like pension contributions. Chancellor Rachel Reeves announced a £2,000 cap on the amount that can be added through salary sacrifice before National Insurance is levied.
Former pensions minister Steve Webb, now a partner at Lane Clark & Peacock, suggested workers might increase their contributions. 'You can max out [your contributions]. Anything you can sacrifice before April 2029 is worth a look,' he told The Guardian.
Government estimates indicate over 2.8 million people could reduce their pension saving due to the clampdown. The changes are expected to raise £4.8 billion for the country's coffers in 2029-30, dropping to £2.5 billion in 2030-31.
Taxpayer funding of salary sacrifice has risen from £2.8 billion in missed NI contributions in 2016-17 to £5.8 billion in 2023-24. This was projected to reach £8 billion by 2030-31 before the changes.
Salary sacrifice offers benefits including lower NI contributions for employees, reduced income tax liability, and access to non-cash benefits. Employers also lower their tax bill and can improve staff retention.
For example, an employee with a gross salary of £30,000 would pay £1,394 in NI, while their employer pays £2,884 in NICs and contributes £900 to their pension. After salary sacrifice, the employee's gross salary drops to £28,500, with employer pension contributions of £2,400 and NICs of £2,677. The employer saves £207, and the employee saves £120, according to Penfold.
Non-cash benefits from salary sacrifice include childcare vouchers, cycle-to-work schemes, and company cars. The Chancellor's changes apply to pension contributions, with employees paying NI on amounts above £2,000 from April 2029.
Ms Reeves argues higher earners benefit disproportionately, but a Freedom of Information request by Mr Webb shows 1.2 million employees sacrificing more than £2,000 are basic rate taxpayers.
