More than three million pension savers will be hit by changes to salary sacrifice on contributions.
Chancellor Rachel Reeves used her Autumn Budget last month 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.
Capping NI relief on salary sacrifice to the first £2,000 is expected to raise £4.8 billion for the Treasury in 2029/2030 and £2.5 billion in 2030/2031.
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That may be nice for the nation’s finances but a government impact assessment published this week shows 3.3 million workers who use salary sacrifice to make pension contributions will be affected and could face higher tax bills.
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That is higher than it previously estimated just last week in the Autumn Budget document.
What are the pension salary sacrifice changes?
Salary sacrifice is a popular way for employees to make pension contributions.
Money is put into their pension pot from their gross pay, adjusting their net income. This reduces the payroll taxes paid by an employee and employer.
Government guidance shows the cost as a 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.
To combat this, a £2,000 salary sacrifice contribution limit will be introduced from 6 April 2029. Any salary sacrificed for pensions above this limit will attract Class 1 primary NI contributions for employees and Class 1 secondary NI contributions for employers on the relevant amount.
Who will be affected by pension salary sacrifice changes?
Government data suggests 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.
This means 44% of employees using salary sacrifice for pensions would be impacted by the changes, while 56% around 4.3 million people remain protected by the £2,000 threshold.
However, the Budget document had estimated that just 26% would lose out from the changes.
The average additional employee NI contribution liability is estimated to be £84 in the first year of impact.
The guidance recognises that some individuals may seek to reduce the amount of salary sacrifice pension contributions they make to limit the impact of these changes.
However, the document doesn’t mention any impact caused by the disincentive to contribute more into a pension if it means a higher tax bill.
Nicholas Nesbitt, private client partner at financial consultancy Forvis Mazars said this may actually disproportionately hit those earning under £50,270, as they will be paying eight per cent NI where they are aiming to save well for their future. However, higher earners with incomes over £50,270 would see just a two per cent cost on their contributions.
He said: “Many employers pass on NIC savings as further pension contributions for their employees and removing these reliefs could cut employees’ pension savings further.
“That said, a lot can change in four years, and while workers should plan for the changes, the landscape may be different by April 2029.”
Additionally, former pensions minister Steve Webb, now a partner at consultants LCP, warned the number of losers could be greater if employers respond to the change by making pension provision less generous for all workers.
He said: “A Budget measure that was largely seen as complex and technical could have significant real-world implications for millions of workers. At a time when the nation as a whole has a significant ‘under-saving’ problem, this change will make matters worse.
“On the Government’s own estimates, around three in seven of the workers who use salary sacrifice to pay into their pensions will be hit by the change, whilst employers will face a bigger hit because of their higher rate of National Insurance Contributions.
“Although employers have time between now and 2029 to consider their options, there is a risk that some will simply cut back on the generosity of their workplace pension offering, which would be a serious backward step.”
Employers still have a couple of years to contribute into their pension without any caps but they are being urged to keep on saving after 2029.
Laura Suter, director of personal finance at AJ Bell, said: “Despite the NI savings being limited, what you pay in will still be exempt from income tax and workers can still enjoy pension tax relief up to their marginal rate of income tax.
“What’s more, making pension contributions to schemes like SIPPs will still reduce your ‘adjusted net income’. This is important as it can pull you out of higher rate taxes or one of the many punishing tax traps while also boosting your retirement savings.”
