Millions of UK workers face a significant change to how they save for retirement following a key announcement in Chancellor Rachel Reeves's recent budget. From April 2029, a new cap will be placed on the popular salary sacrifice method for pension contributions.
What is the new salary sacrifice cap?
The new rule means that salary-sacrificed pension contributions will only be exempt from National Insurance (NI) for the first £2,000 per year. Any amount contributed above this threshold will be treated as ordinary employee pension contributions within the tax system.
This change has a direct financial impact. Both the employee and their employer will have to pay National Insurance on contributions exceeding the £2,000 limit, leading to an increased tax bill for the saver. Employer NI is charged at 15%, while employee rates are 8% on earnings up to £50,270 and 2% on income above that level.
Who will be affected by the pension changes?
It is estimated that around 7.7 million people, or roughly 20% of the UK workforce, currently use salary sacrifice to pay into their pension. The Treasury has stated the measure is aimed at higher earners, with many basic rate taxpayers unaffected.
For example, a person earning £40,000 a year and making the typical minimum 5% employee contribution (£2,000) would just reach the threshold and see no extra tax. However, increasing that contribution to 6% would breach the cap by £400, resulting in an additional £32 in NI.
The impact escalates with income. An individual earning £50,270 with a 5% contribution would exceed the cap by £513.50, increasing their NI bill by £41.08. A higher earner on £105,000 sacrificing £10,000 would pay NI on £8,000. At the 2% higher rate, this equates to an extra £160.
"There's a danger that the biggest increase in deductions due to NI becoming payable (in % terms) are faced by people just under the £50,270 threshold," warned Charlene Young, savings and pensions expert at AJ Bell.
Expert advice: What should you do now?
Financial planners are urging savers to take proactive steps before the 2029 implementation date. A common recommendation is to maximise salary sacrifice contributions while the full NI relief remains available.
Eamonn Prendergast, a chartered financial adviser, advises people to "review their pension strategy, use available allowances while they last, and plan for life after 2029."
Scott Gallacher of Rowley Turton suggests incorporating pension planning into annual pay discussions. "Instead of giving a full salary increase, employers can direct part of the rise into higher employer pension contributions," he explained. This method achieves a similar tax-efficient outcome and may remain outside future restrictions.
However, Anita Wright of Ribble Wealth Management offered a note of realism, pointing out that many struggling with the cost of living cannot afford to increase contributions now.
Important considerations and the future
Experts caution that while maximising salary sacrifice is beneficial, savers must be aware of downsides. Reducing your salary on paper can affect mortgage applications and you cannot sacrifice pay below the National Minimum Wage. Furthermore, changes to sacrifice agreements are often only permitted annually, potentially locking away cash.
Looking beyond 2029, the unanimous advice is clear: do not stop your pension contributions. Even with the NI cap, pension payments remain exempt from income tax, which can help keep you out of higher tax brackets and boost your retirement fund.
"Despite the changes, pensions remain one of the most tax-efficient and powerful long-term investments and the cornerstone of any serious financial plan," concluded Eamonn Prendergast. Those not using salary sacrifice can still achieve tax relief by managing their 'adjusted net income', albeit with slightly more administration.
