Salary sacrifice changes: millions set to cut pension contributions
Plans to restrict salary sacrifice on pension contributions will lead to lower levels of saving, according to the government's own estimates.
Almost three million people could cut back on pension saving as a result of the impending salary sacrifice clampdown, the government’s own data suggests.
Chancellor Rachel Reeves used her 2025 Autumn Budget to announce a £2,000 cap on the amount workers and their bosses can add into pensions via salary sacrifice before being hit with National Insurance (NI) charges.
The changes will come in from April 2029 and are expected to raise £4.8 billion for the Treasury in 2029/2030 and £2.5 billion in 2030/2031.
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But while this may be good for the nation’s finances, it could be a blow for people’s own pension savings.
Research by former pensions minister Steve Webb, now a partner at consultancy LCP, found the government’s own estimates suggest more than 2.8 million workers are expected to cut back on pension saving as a result of the changes.
It comes despite the government-backed Pensions Commission recently warning that people aren’t saving enough for their retirement.
The impact of pension salary sacrifice changes
Salary sacrifice has long-been a popular way for employees to make pension contributions.
Money is added into an employee’s pension pot from their gross pay, adjusting their net income. This also reduces the payroll taxes paid by an employee and employer.
But government guidance shows the cost of the relief has increased markedly, from £2.8 billion in forgone National Insurance contributions in tax year 2016/2017, rising to £5.8 billion in 2023/2024.
Without any change, it is expected that this would almost triple to £8 billion by 2030/2031.
Capping the relief will save the government money.
HMRC has previously disclosed that an estimated 7.7 million employees currently use salary sacrifice to make pension contributions.
Of these, 3.3 million sacrifice more than £2,000 of salary or bonuses.
The Office for Budget Responsibility has already warned that a consequence of the policy could be a reduction in contributions.
A Freedom of Information (FOI) request to HMRC by Webb has revealed the extent of this.
The FOI asked for the government’s assessment of the number of employees that are assumed to cut their contributions in 2029/30.
HMRC said it expects more than 2.8 million workers to reduce their contributions.
This is broken down as 2.2 million earning above the £50,270 upper earnings limit, while 666,000 will generally be basic rate taxpayers.
Webb said: “The government has presented the changes to salary sacrifice for pensions as being a relatively painless way of cracking down on a tax break mostly enjoyed by the well off.
“But these figures show that the effects of the policy will be far more damaging than had previously been admitted.”
He suggests it is hardly ‘joined-up government’ to be stressing the need for more pension saving one day through the Pensions Commission and then implementing a policy that will reduce the pension savings of millions the next.
Webb added: “At a time when the government is running a major Commission to tackle the issue of pension under-saving, it is shocking that a separate government policy will result in more than 2.8 million workers cutting back on pension saving.”
A Treasury spokesperson said: “High earners piled in huge bonuses through salary sacrifice without paying a penny in tax – a taxpayer funded perk largely benefitting the better off.
“Our fair reforms protect 95% of workers earning under £30,000 using salary sacrifice, and as IFS analysis shows, over three quarters of under 30s will be unaffected.”
