Chancellor Rachel Reeves' pension change will cap salary sacrifice at £2,000 a year from April 2029, affecting an estimated 3.3 million households, according to HM Revenue and Customs (HMRC) figures. The measure, announced in the most recent Budget, has sparked warnings from financial experts and industry bodies.
What is salary sacrifice and how does it change?
Salary sacrifice allows workers to give up a portion of their salary and place it directly into their workplace private pension scheme. Under current rules, this money is exempt from income tax and National Insurance (NI) contributions, but it is locked away until the saver turns 57. From April 2029, salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from NI.
Impact on savers and expert advice
Laura Suter, Director of Personal Finance at AJ Bell, warned: "The National Insurance perks of using salary sacrifice for pensions will be capped at £2,000 per year from April 2029. But whatever you do, don't stop your pension contributions." She explained that contributions will still be exempt from income tax, and workers can enjoy pension tax relief up to their marginal rate. Additionally, making pension contributions to schemes like SIPPs will reduce 'adjusted net income', potentially pulling savers out of higher tax brackets or other tax traps.
HMRC guidance indicates that approximately 7.7 million employees currently use salary sacrifice for pension contributions, of whom 3.3 million sacrifice more than £2,000 annually. These 3.3 million savers are on course to be affected by the change.
Industry criticism and long-term concerns
The announcement has been criticised by pensions industry bodies, who argue many people are already heading for financial difficulty in later life. Yvonne Braun, director of policy, long-term savings, health and protection at the Association of British Insurers (ABI), previously stated that "the wider work required to rebuild people's trust in the stability of pensions will take years." The cap applies only to National Insurance savings, meaning income tax benefits remain intact, but experts urge savers not to reduce contributions despite the change.
