A former pensions minister has issued a stark warning that millions more British workers could be indirectly affected by upcoming changes to the salary sacrifice scheme than official government estimates suggest.
Budget Announcement Sparks Concern
Chancellor Rachel Reeves announced in the November budget that from April 2029, only the first £2,000 of pension contributions made through salary sacrifice arrangements will be exempt from National Insurance. Contributions exceeding this £2,000 threshold will become subject to both employer and employee National Insurance contributions from that date forward.
HM Revenue and Customs estimates that 7.7 million employees currently use salary sacrifice to make pension contributions, with 3.3 million of those individuals sacrificing more than £2,000 annually.
Expert Warns of Wider Impact
Steve Webb, a former pensions minister and current partner at LCP, argues that the number of people affected could significantly exceed the government's estimate of 3.3 million. He points to recent analysis from the Office for Budget Responsibility that highlights the "highly uncertain" ways employers might respond to these changes.
Webb told the Money blog that employers facing increased costs might implement workplace-wide approaches that affect all employees, not just those contributing above the £2,000 threshold. Alternatively, as noted in the OBR document, employers could increase pension contributions in place of wage growth or reduce contractual salaries to offset the financial impact.
Potential Employer Responses
Webb explained the potential consequences in stark terms: "This change represents a multi-billion pound hit on employers who will not simply accept it without response. They are likely to respond by squeezing wages, cutting back on pension benefits, or abandoning salary sacrifice arrangements altogether. In all these scenarios, the impact will not be limited to the 3.3 million people who sacrifice more than £2,000 annually, as the government claims, but could extend to millions more employees within those workplaces who could all experience negative effects."
He added a particularly concerning note: "Many of these affected individuals will be people on modest incomes whom the government claims to be protecting through these reforms."
Government Response and Justification
In response to these concerns, a Treasury spokesperson provided a statement to Money: "This information is not new - the costing note published at the budget already included the behavioural impacts of this measure. Our reforms are designed to protect 95% of workers earning under £30,000 who use salary sacrifice arrangements, while addressing costs that were projected to triple to £8 billion as high-earners increasingly used the scheme to shield bonuses from taxation."
Understanding the £2,000 Cap
The £2,000 salary sacrifice cap represents a significant shift in pension taxation policy. Under current rules, pension contributions made through salary sacrifice arrangements are exempt from both employee and employer National Insurance contributions, providing substantial tax advantages for both parties. The new policy will limit this exemption to the first £2,000 of contributions, creating new financial considerations for:
- Employees currently contributing more than £2,000 through salary sacrifice
- Employers offering salary sacrifice pension schemes
- Workplace pension administrators and providers
- Financial advisors helping clients navigate these changes
The changes, scheduled to take effect in April 2029, provide several years for adjustment but have already sparked significant debate about their potential wider economic impact and fairness across different income groups.
