Under measures announced in the Budget, some pension savers will be hit with the amount of money they can put into their pension without paying National Insurance (NI).
From 2029, there will be a limit of £2,000 per year that can be avoided from employer and employee NI contributions using a method called salary sacrifice.
There is currently a very high limit on the amount an employee can agree to pay to their employer, with the scheme being seen as a way of encouraging workers to pay into their pension.
The Office for Budget Responsibility (OBR) has estimated that the measure will lead to an additional £4.7 billion increase in NI contributions in 2029.
Salary sacrifice allows the employee and employer to agree that a sum of money will be taken out of the salary and transferred to a pension before National Insurance Contributions (NICs) and income tax are hit on the salary. Employees “give up” a higher salary, but they receive a tax-free amount with each pay check.
Chancellor Rachel Reeves said the current system favors high-income earners and those working in financial services, “who can put their bonuses into a tax-free pension”.
The £2,000 limit on salary sacrifice was a “practical step”, Reeves said, and would mean people on low- and middle-incomes could continue to use the scheme “without paying any more in tax”.
The salary sacrifice policy also reduces the total amount of employer National Insurance Contributions (NICs) paid by companies, so any cap will mean a higher NIC bill for companies or a reconsideration of whether they provide the benefit.
About a third of private sector employees and a tenth of public sector employees use salary sacrifice schemes for their pension savings. Analysis by HM Revenue & Customs revealed that around 7.7 million employees used it in 2024.
Former pensions minister Steve Webb, now a partner in the LCP, said there is more than three years until National Insurance payments on salary sacrifice are due, meaning it is unlikely the Chancellor will raise the £4.7 billion the OBR estimates.
“The decision not to implement this change until 2029 creates a huge opportunity for companies to restructure the way they offer pay and pensions to reduce or eliminate this new charge,” Mr Webb said.
“It is very likely that this policy will raise only a fraction of the amount the Chancellor expects.”
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