Pension salary sacrifice hit in Autumn Budget with new £2,000 cap

The Chancellor’s Budget announcement today introduced a significant change to workplace pensions, with National Insurance (NI) relief on salary sacrifice pension contributions to be capped at £2,000 per year from April 2029. This measure could have far-reaching consequences for employees, employers and the pensions sector broadly.

Salary sacrifice remains permitted, but the NI savings that make it so tax-effective for both workers and businesses will now be restricted. Employees and employers will only receive NI relief on the first £2,000 of salary sacrificed annually. Beyond that threshold, contributions will still go into pensions, but without the NI advantage.

As well as impacting retirement savings, it could also hit those utilising salary sacrifice to manage the £100,000 - £125,140 tax trap, which can result in an effective marginal tax rate of up to 60%, or parents seeking to maintain access to childcare benefits by lowering their income via pension salary sacrifice.

With some time until the proposed rule is planned to come into effect, reviewing contribution strategies early is important.

Aside from the salary sacrifice NI relief cap, there are no additional pension reforms in this Budget. This stability will come as a welcome relief for many who had concerns over changes to tax-free cash and offers an opportunity to review long-term plans and ensure contributions are optimised under current rules.

For those on lower earnings, the change may have little effect, as contributions under auto-enrolment minimums typically fall within the cap. Higher earners, however, will see reduced efficiency when sacrificing bonuses or variable pay.

This could make pension saving less attractive and increase take-home tax costs, but as with any long-term investment, the compound impact of this could be significantly larger when missed potential future investment returns are taken into account.

Of note is the fact that public sector schemes do not generally operate on a salary sacrifice basis but rather as ‘net pay arrangements.’ A cap on employee salary sacrifice for pension contributions should therefore have little impact on the public sector, including all of the civil service and government-backed schemes.

The cap on NI relief doesn’t just affect employees, it also hits businesses. Salary sacrifice has been a cost-saving mechanism for employers because reducing gross pay lowers their NI liability which for employees is a significant rate of 15%. In many cases, employers will even arrange to contribute some of their own NI savings as an additional pension contribution to employees who salary sacrifice to encourage the strategy and reduce costs across the board.

By capping relief at £2,000 per employee, the government removes much of that incentive. For firms with large workforces or generous pension schemes, this could mean a significant increase in NI costs.

For companies that currently share NI savings with staff, the change could also affect employee morale and retention, as workers see less benefit from sacrificing salary. In sectors where salary sacrifice is widely used, such as professional services and large corporates, the impact could be substantial.

While it’s too early to know for sure what the impact of these changes might be, we could see employers who currently offer salary sacrifice consider running a ‘two-tier’ system for salary sacrifice. This could see companies offer salary sacrifice scheme up to £2,000 and then run a ‘relief at source’ or ‘net pay arrangement’ scheme for amounts above.

With NI relief restricted, employees and employers should review pension strategies. High earners may need to explore alternative tax-efficient options, while businesses should assess the impact on benefits packages.

Our experts at Evelyn Partners can help understand the Budget’s impact on your financial plan, your investment portfolio or offer a total wealth management perspective on your overall personal financial situation.

Book an appointment to discuss what the changes mean for you, and how to navigate what’s next.