Millions of workers across the UK are facing a significant financial blow following major changes to salary sacrifice pension schemes announced in the recent Budget. New data from HM Revenue and Customs (HMRC) indicates the overhaul will directly impact a substantial portion of the nation's retirement savers.
Who Will Be Affected by the New Cap?
According to the official statistics, an estimated 7.7 million employees currently use salary sacrifice arrangements to boost their pension pots. This popular method allows staff to effectively reduce their salary in exchange for higher employer pension contributions, thereby lowering their overall income tax and National Insurance liability.
However, the Chancellor, Rachel Reeves, has now moved to pare back these schemes. From April 2029, the tax-free exemption for sacrificed salary will be capped at £2,000. Contributions exceeding this threshold will no longer benefit from National Insurance (NI) savings and will be treated as ordinary pension contributions.
Of the nearly eight million people using these arrangements, 3.3 million sacrifice more than £2,000 of their salary or bonuses annually. This group is now at immediate risk of being hit by the new rules.
The Financial Impact on Savers and Employers
The change means that any pension contributions made via salary sacrifice above the £2,000 limit will be subject to standard Class 1 National Insurance rates. This translates to an eight percent charge on earnings under £50,270 and a two percent charge on income above that figure.
Analysis by financial research firm Finder illustrates the uneven impact. An individual earning the UK average salary of £39,039 could lose around £215 as a result of the change. In contrast, a higher earner on £75,000 per annum, saving 15% of their salary, might see their take-home pay reduce by only £140, due to the lower two percent NI rate applied to their bracket.
The government's own documents state the measure will affect approximately 290,000 employers who operate these schemes. They will face increased administrative burdens and higher costs, as they will need to account for, report, and pay Class 1 NI contributions on the relevant pension amounts.
Industry Backlash and Government Justification
The pension industry has reacted with fierce criticism to the announcement. Experts have expressed confusion at the decision to strip away incentives for retirement saving, particularly during a national pension crisis.
Sir Steve Webb, former Pensions Minister and partner at Lane Clark and Peacock, condemned the move. “At a time when the nation as a whole has a significant ‘under-saving’ problem, this change will make matters worse,” he stated. “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.”
Chancellor Reeves defended the policy, arguing that the current system disproportionately benefits high earners, particularly those in the financial services sector who can shield large bonuses from tax. She contends it does not ultimately aid middle or basic-rate taxpayers to the same degree.
The Treasury's rationale is partly based on cost. An HMRC document noted that the expense of the schemes was forecast to treble to £8bn by 2030 without intervention. The overhaul is predicted to raise £4.7bn for the Treasury in the 2029-30 financial year, followed by a further £2.6bn the year after.
