Salary sacrifice cap ‘is short-sighted tax grab undermining retirement security’

Workers and employers will feel the “pain” from a £2,000 salary sacrifice cap on pensions announced in the Budget, finance experts have said.

Fears were raised that employers would make workplace schemes less generous and that people’s long-term financial security would be eroded.

The change means that salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from national insurance from April 2029.

Contributions above £2,000 will be treated as ordinary employee pension contributions in the tax system and subject to national insurance contributions.

A document, released by the Office for Budget Responsibility in error ahead of Chancellor Rachel Reeves’s Budget speech, said: “The policy results in an increase in NICs (national insurance contributions), which is estimated to raise £4.7 billion in 2029/30 and £2.6 billion in 2030/31.

“The costing assumes that, in most cases, employee pension contributions above £2,000 that were part of a salary sacrifice scheme will become subject to employer and employee NICs, either because they move to a standard pension scheme or continue in a salary sacrifice scheme under the new tax arrangements.”

Employers may offer salary sacrifice as part of their pension scheme as a tax-efficient way to help workers boost their pots.

The schemes enable people to maintain their take-home pay, as people end up paying lower NI contributions.

Yvonne Braun, director of policy, long term savings, health and protection, at the Association of British Insurers (ABI), said: “Capping salary sacrifice for pension saving is a short-sighted tax grab which will lower pension saving and undermine people’s retirement security.

“It also goes against the Government’s ambition to increase scale in pensions to drive more investments into UK businesses and infrastructure.

“While it’s encouraging that employers and payroll providers will have until 2029 to make the necessary changes to their systems, the wider work required to rebuild people’s trust in the stability of pensions will take years.”

Lisa Picardo, chief business officer UK at PensionBee, said: “Capping salary sacrifice sends the wrong message at a time when the UK needs to encourage greater long-term saving, not constrain it. Reforms should prioritise strengthening retirement outcomes and build on what we have, not tear them down.”

David Little, a partner in financial planning at Evelyn Partners, said the cap “could also lead to lower salary increases, scaled-back pension benefits, or even headcount reductions to offset costs.”

He added: “Considering the demographic timebomb we are facing, with an ageing population and declining birth rates, disincentivising saving via a pension may come back to haunt the Government in the future.”

Tess Page, UK wealth strategy leader at Mercer, said: “The Government should carefully consider the long-term individual and societal consequences of these changes.”

She added: “Unless retirement saving incentives remain effective and employers can continue to support their employees’ long-term financial wellbeing, the state will end up shouldering an even greater burden.”

Sir Steve Webb, a former pensions minister who is now a partner at consultants LCP (Lane Clark & Peacock), said there was a high risk that the changes could raise a smaller amount than expected.

He said: “The decision not to implement this change until 2029 creates a huge opportunity for firms to restructure the way that they offer pay and pensions in order to mitigate or eliminate this new charge.

“There is a high probability that this policy will only raise a fraction of the amount expected by the Chancellor.”

Jon Greer, head of retirement policy at wealth manager Quilter, described the cap as “a deeply misguided move”.

He said: “At a time when the Government acknowledges that tomorrow’s pensioners risk being poorer than today’s, policy should be focused on incentivising saving and not dismantling one of the most effective tools we have.

“Salary sacrifice has long been a cornerstone of workplace pension strategies, helping millions boost contributions and plan with confidence.

“Restricting it will inevitably lead to cutbacks. A survey of 267 of our customers in October found one in four (25%) said they would stop using salary sacrifice if tax benefits were reduced or removed, while nearly one in five (19%) said they would contribute less.

“That is a devastating prospect when we’re already sleepwalking into a retirement crisis. What the smorgasbord approach fails to recognise is that small tweaks can have huge behavioural impacts – and this one could harm millions of future retirements.

“Employers will also 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.

“That’s significant sums stripped from pay packets and business budgets, funds that could otherwise be invested in long-term financial security.”

Renny Biggins, head of policy – products and long-term savings at The Investing and Saving Alliance, said: “The Government is arm-wrestling itself over pensions. One hand recognises the retirement income crisis facing this country, while the other limits the very schemes used to incentivise pension contributions.

“This move will only further undermine pensions adequacy and retirement savings. We need to focus on encouraging, not penalising, saving into private pension pots.”

Claire Trott, head of advice at St James’s Place, said: “Pensions cannot deliver long-term security if the rules keep shifting every few years.”

Andrew Prosser, head of investments at InvestEngine, said: “People will need to review their workplace pension and maximise employer contributions wherever possible.”

Steven Cameron, pensions director at Aegon UK, said: “Those sacrificing more of today’s salary for a higher contribution towards their retirement income may question why the Chancellor is penalising them.”

Rebecca Williams, divisional lead of financial planning at Rathbones, said: “Capping salary sacrifice at £2,000 is a blunt instrument that risks doing more harm than good.”

Patrick Heath-Lay, chief executive officer of People’s Partnership, provider of People’s Pension, said: “Even with salary sacrifice capped at £2,000 from 2029, pensions remain strongly tax advantaged.”

He added: “We would urge pension savers not to mistake this change for a fundamental overhaul of the pension tax system: these changes should not dent confidence in pension saving.”