Warning issued over new salary sacrifice rules set to impact pensions

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

Upcoming changes to pension salary sacrifice schemes could disproportionately affect workers on modest incomes, following new analysis.

Salary sacrifice schemes currently allow employees to boost their pension pots in a tax-efficient manner, often leading to higher take-home pay through reduced National Insurance Contributions (NICs).

However, from April 2029, salary-sacrificed pension contributions exceeding an annual threshold of £2,000 will lose their exemption from NICs.

The changes, announced in the budget, mean contributions above this threshold will be treated as ordinary employee pension contributions, subject to both employer and employee NICs.

This move has prompted fears that those on more modest earnings, who rely on these arrangements to boost their pension pots, could face an unexpected financial impact.

Figures released by HM Revenue and Customs (HMRC) in December indicated around 3.3 million pension savers were directly on course to be hit.

HMRC has said an estimated 7.7 million employees use salary sacrifice to make pension contributions – and of these, 3.3 million sacrifice more than £2,000 of salary or bonuses.

On Thursday, Sir Steve Webb, a former Liberal Democrat pensions minister, highlighted a new document published by the the Office for Budget Responsibility (OBR), which he said indicated that many workers sacrificing less than £2,000 could also lose out.

From April 2029, salary-sacrificed pension contributions exceeding an annual threshold of £2,000 will lose their exemption from NICs (Alamy/PA)

The OBR document said that the behavioural response to the measure was “highly uncertain, given the various channels through which employers and employees can respond”.

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Sir Steve, who is now a partner at consultants LCP (Lane Clark & Peacock), said: “Far from ordinary workers being ‘protected’ from the changes, we could see millions of people on modest incomes losing out as well, further undermining their incentive to save in a pension.

“We urgently need the Government to be clear about the true scale of the losses from this policy.”

Sir Steve highlighted concerns that some workers who pay less than £2,000 could lose because of lower future pay rises or a lower contractual salary.

The OBR document said that: “Employers could look to formalise salary sacrifice arrangements to replicate the tax benefits of salary sacrifice by increasing contributions in place of wage growth or lowering contractual salary in exchange for higher employer contributions.”

The document highlighted “pass through”, with an assumption that a portion of some of the cost to employers would be passed on. This could be through how they paid pension contributions, salaries, or bonuses, for example.

Some employers could end salary sacrifice schemes, which would affect the workforce generally.

Sir Steve said: “The budget change to salary sacrifice rules around pensions was a huge measure which will cause employers to rethink their pay and pensions policies.

“The independent OBR shows very clearly that there are a range of ways in which employers will respond which will affect the wider workforce and not just those contributing over £2,000 via salary sacrifice.”

Daniel Gallon, head of taxation at the Association of British Insurers said: “The OBR’s analysis shows the impact of the salary sacrifice changes could reach far more people than expected, and it’s vital the Government looks closely at how employers and employees across all income levels may feel the effects.

“A survey we ran with Reba (the Reward and Employee Benefits Association) found that 99% of businesses expect to be impacted by the cap, with many bracing for more admin, reduced benefits, and pressure on pension contributions.

“Taken together, it’s a clear warning sign that continued tinkering with the tax system risks opening the door to a new era of under‑saving we can’t afford to ignore.”