Millions of workers could see their pension contributions become less tax-efficient under new plans announced by Chancellor Rachel Reeves.
Following new warnings from the Office for Budget Responsibility (OBR), what was initially presented as a targeted reform may affect more people than expected.
From April 2029, a new £2,000 annual cap will be introduced on pension contributions made through salary sacrifice that are exempt from National Insurance (NI).
Contributions above this level will still be allowed, but both employees and employers will begin paying NI on the excess.
What are the salary sacrifice changes to pensions?
Salary sacrifice is when an employee gives up part of their salary in exchange for a pension contribution from their employer.
This arrangement is highly tax-efficient as the sacrificed salary is not subject to Income Tax or NI for either party.
Under the new rules, only the first £2,000 per year of salary sacrificed into a pension will remain free of NI.
Anything above that will attract employee NI and employers will also face higher NI costs.
While this does not limit how much can be paid into a pension, it reduces the NI advantage that salary sacrifice has historically offered.
Who will be affected by the reform?
Previous Government data estimated that around 3.3 million workers sacrificed more than £2,000 of their salary or bonuses.
However, updated OBR analysis indicated that another 4.3 million people could feel the effects.
Lower and middle earners could be disproportionately affected. Employees earning below £50,270 could face NI charges of up to 8 per cent on contributions above the cap, while higher earners would pay 2 per cent.
How will this affect your pension?
The changes may slightly reduce the efficiency of salary sacrifice, but they do not remove the main benefits of pension saving.
Pension contributions will still attract full Income Tax relief, whether made through salary sacrifice or personal contributions.
Pension contributions will continue to reduce your adjusted net income, which can help you avoid tax traps such as the £100,000 personal allowance taper and the child benefit charge.
What should you do now to prepare?
With the cap not coming into force until 2029, there is time to plan.
Many people may choose to increase their salary sacrifice contributions while the full NI relief is still available.
Others may decide to wait, especially if further policy changes are announced before implementation.
Making any sudden decisions, such as significantly reducing pension savings or retiring early to avoid the change, can have lasting financial consequences.
It can be overwhelming knowing what the right decisions are, but our professional team are here to support you.
We can assess how the salary sacrifice cap could affect your take-home pay and ensure your pension contributions align with your long-term financial plans.
With millions potentially affected, early advice can help you stay in control of your finances.
If you are unsure how the salary sacrifice changes will affect you, contact us today.
