Chancellor Rachel Reeves has announced a significant overhaul of salary sacrifice pension schemes, implementing a £2,000 annual cap per employee that will take effect from April 2029.
The End of an Era for Salary Sacrifice
The Treasury revealed that salary sacrifice arrangements, which allow employees to exchange part of their salary for benefits like pension contributions, will face strict new limitations. From April 2029, the exemption will be capped at £2,000 per employee annually, with any additional pension contributions beyond this amount subject to standard National Insurance rates.
Chancellor Reeves defended the move, stating: "Salary sacrifice for pensions, which was intended to be a small part of our pension system, is forecast to treble in costs from £2.8bn in 2017 to £8bn by 2030." She emphasised that the schemes primarily benefit high earners, particularly "those in the financial services sector putting their bonuses into pensions tax-free", while minimum-wage workers "don't benefit at all".
Industry Backlash and Retirement Concerns
The decision has sparked significant concern among employers and pension experts, who warn it could exacerbate Britain's retirement savings crisis.
Jon Greer, head of retirement policy at Quilter, expressed serious reservations: "Employers will...feel the pain. After last year's increase in employer national insurance contributions, this represents a double whammy, removing flexibility to support staff saving and stretching reward budgets even further."
Mike Ambery, retirement savings director at Standard Life, highlighted the timing concern: "This change comes as the government revives the Pensions Commission to tackle the UK's retirement savings gap. Limiting salary sacrifice could undermine efforts to improve savings adequacy at a time when millions are already undersaving for retirement."
The Treasury expects the measure to raise an additional £4.7bn, while simultaneously protecting the 25% tax-free lump sum following public backlash against proposed changes to pension withdrawal rules.
Alternative Strategies for Tax Efficiency
Despite the crackdown on salary sacrifice, financial experts point to several remaining options for Britons seeking to optimise their tax position.
Individual Savings Accounts (ISAs) continue to offer substantial tax advantages, with the current £20,000 annual allowance remaining available until April 2027, when cash ISAs will see their ceiling reduced to £12,000. Stocks and shares ISAs remain unaffected by this change.
For aspiring homeowners, Lifetime ISAs provide both a tax-free wrapper and a 25% government bonus on contributions, up to £1,000 annually.
Married couples and civil partners can utilise the marriage allowance, enabling the transfer of £1,260 of personal allowance between partners, potentially saving up to £252 annually.
Business owners have additional options, including the Enterprise Investment Scheme, which offers 30% income tax relief on qualifying investments, and considering incorporation to benefit from potentially lower corporation tax rates compared to higher income tax bands.
The changes mark a significant shift in pension taxation policy, potentially affecting thousands of workers who have relied on salary sacrifice arrangements to boost their retirement savings while reducing their tax liabilities.
