Chancellor Rachel Reeves' recent Budget measures, including the controversial decision to overhaul salary sacrifice arrangements, are set to impact millions of UK workers, with new research revealing ordinary earners will bear the brunt of the changes.
Who Loses Most from the Salary Sacrifice Cap?
According to analysis by personal finance platform Finder, the introduction of a £2,000 tax-free cap on salary sacrifice from April 2029 will hit basic and higher rate taxpayers hardest, contrary to government claims that the system primarily benefits high earners.
The research found that an average UK earner on £39,039 annually, saving the recommended 15% through salary sacrifice (12% personal and 3% employer contributions), stands to lose £215 from their yearly take-home pay.
Perhaps most strikingly, those earning £52,720 will be the worst affected, facing a reduction of £341.80 per year in their disposable income. In contrast, someone with a £75,000 salary would see a smaller impact of just £140 annually, due to higher earners facing only a two per cent national insurance charge on contributions above the cap.
Reeves' Rationale Versus Financial Reality
Defending the changes in her Wednesday speech, Chancellor Reeves stated that salary sacrifice schemes “mainly benefit high earners,” particularly those in financial services allocating bonuses tax-free into pensions, while minimum-wage workers “don’t benefit at all.”
She highlighted that the cost of pension salary sacrifice is forecast to treble from £2.8 billion in 2017 to £8 billion by 2030, representing a significant government expenditure.
However, George Sweeney, a personal finance expert at Finder, countered this perspective: “For a Budget where the broadest shoulders are supposed to bear the biggest burden, it’s surprising that regular working people… will take the worst hit on their take-home pay with the new salary sacrifice cap.”
Long-Term Consequences for Retirement Planning
With approximately 7.7 million UK workers currently using salary sacrifice schemes, concerns are mounting that the cap could distort long-term saving behaviours.
Sweeney warned: “This new £2,000 salary sacrifice threshold could skew the long-term pension savings habits among ordinary people, as some may opt to reduce their contributions to avoid paying this extra NI or at least minimise its impact.”
This poses a particular challenge given that financial experts typically recommend workers save at least 15% of their income to secure adequate retirement funds.
Navigating the New Tax Landscape
Despite the challenges posed by the salary sacrifice cap, financial experts suggest several strategies to mitigate the impact, particularly for those approaching the £100,000 threshold where they lose access to 30 hours of free childcare.
Shaz Bishop, wealth manager at RBC Brewin Dolphin, advised: “Plan your pension contributions around your tax band, consider your partner or spouse’s tax position to balance out income and assets… and ensure you utilise and maximise all your employee benefits.&rdquo
Individual Savings Accounts (ISAs) remain a valuable alternative, though the Chancellor also announced a reduction in the cash ISA allowance from £20,000 to £12,000 effective April 2027. A stocks and shares ISA may present a more favourable option for those seeking to maximise tax-efficient savings alongside their pension provisions.
