Millions of UK workers are set to see their pension tax bills rise following a major change to salary sacrifice rules announced in the recent budget. Chancellor Rachel Reeves confirmed that from April 2029, the national insurance (NI) relief on salary-sacrificed pension payments will be capped at £2,000 per year.
How the New Pension Cap Will Work
Currently, when you pay into your pension via salary sacrifice, neither you nor your employer pay national insurance on the amount sacrificed. This provides a significant tax saving. Under the new rules, any contributions above the £2,000 annual threshold will be treated as ordinary employee pension contributions in the tax system.
This means both the employee and the employer will have to pay national insurance on the excess amount. For employees, NI is charged at 8% on earnings up to £50,270 and 2% above that. Employers will face a 15% charge.
The Treasury estimates that around 7.7 million people – roughly 20% of the workforce – use salary sacrifice for their pension. However, officials state that 74% of basic rate taxpayers using the scheme will be unaffected, as the measure is aimed at higher earners.
Who Will Be Affected? A Look at the Numbers
The impact varies significantly depending on your earnings and contribution level. For example, a person earning £40,000 a year making the typical minimum 5% employee contribution would just reach the £2,000 cap and see no extra tax.
However, Charlene Young, savings and pensions expert at AJ Bell, warned of a potential pinch point. "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," she said.
To illustrate, someone earning £50,270 (the basic rate maximum) and making a 5% contribution would breach the cap by £513.50, increasing their NI bill by £41.08. In contrast, 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.
Expert Advice: What You Should Do Now
Financial planners are urging savers to take action well before the 2029 deadline. Eamonn Prendergast, a chartered financial adviser at Palantir Financial Planning, advises employees to maximise their contributions under the current rules.
"People should review their pension strategy, use available allowances while they last, and plan for life after 2029 by building flexibility into their savings," he told Money.
Scott Gallacher, director of Rowley Turton, suggests a strategic approach to pay rises. "Instead of giving a full salary increase, employers can direct part of the rise into higher employer pension contributions. This isn't salary sacrifice in the traditional sense, but it achieves a similar outcome," he explained, noting this method may remain outside future restrictions.
However, Anita Wright of Ribble Wealth Management sounded a note of caution, highlighting that many struggling with the cost of living cannot afford to 'load up' contributions now.
Key Considerations and The Future
Experts warn that while maximising salary sacrifice is tempting, it lowers your official salary, which can affect mortgage applications. You also cannot sacrifice salary below the national minimum wage.
Looking beyond 2029, the unanimous advice is clear: do not stop your pension contributions. "Despite the NI savings being capped, what you pay into pension will still be exempt from income tax," emphasised Charlene Young. This tax relief remains a powerful tool, especially with frozen income tax allowances.
Prendergast added that pensions are still a cornerstone of financial planning, and many employers will continue to match contributions after the cap is introduced.
