- The legislation putting into effect the changes to pensions salary sacrifice has been passed into law, as the National Insurance Contributions (Employer Pensions Contributions) Act today received Royal Assent
- The National Insurance (NI) savings on salary sacrifice for pension contributions will be capped at £2,000 a year from 6 April 2029
- During its passage through Parliament, the House of Commons defeated House of Lords amendments to increase the cap from £2,000 to £5,000
- Charging employees NI on pension contributions above the cap will reduce take home pay
- Despite the changes, pensions will remain a valuable tax-efficient way of saving for retirement and pension savers will still obtain income tax relief on all contributions they pay into their pensions (within set limits)
- Some employers have already started to consider how to mitigate the additional costs of a 15% NI charge on excess contributions
Rachel Vahey, head of public policy at AJ Bell, comments:
“The legislative foundation for the cap on pensions salary sacrifice has now been passed into law, despite the change not coming in for another three years.
“From 6 April 2029, the amount of employer pension contributions made through salary sacrifice that are free from National Insurance will be limited to £2,000 a year. Anyone exchanging a larger amount of salary for a pension contribution could be hit hard, seeing their National Insurance bill increase whilst their take home pay falls.
“This feels a counterintuitive move, given the government’s supposed mission to galvanise the nation into saving for their financial futures. Many may instead feel it sends a signal that pension tax advantages are politically up for grabs, casting a shadow over the incentive to save. It could discourage some from saving as much for their retirement, leaving them worse off later in life.
“During the legislation’s journey through parliament, the House of Lords made a determined effort to soften the blow by proposing an increase in the pension salary sacrifice pension cap from £2,000 to £5,000, yet the House of Commons was quick to reject these changes and uphold the original limit.
“But with a three year wait until the legislation becomes a reality, there is always the possibility that a future government may rethink and repeal the legislation and return employers and employees to the current position.
“Employers and employees now have less than three years to make the most of the current tax advantages before they get watered down. Despite these changes, pensions remain a hugely tax-efficient way of saving for retirement. Workers should make the most of the tax perks on offer, for example by taking their employer up on any offers to pay pension contributions through salary sacrifice and benefit from the full NI saving on offer.
Hitting average earners the hardest
“The below table shows the impact on employees’ pay packets and the extra NI bill to employers per year, assuming the employee has agreed to exchange 6% of their notional salary for a pension contribution, with a 6% employer match.
“Controversially, the biggest impact of the change will be on those earning between £45,000 and £50,000, as their take home pay decreases more than others. This is due to NI contributions dropping from 8% on earnings between £12,570 and £50,270 to 2% above that threshold. Any excess over the £2,000 cap will be charged at 8% for those earning just below £50,000, while those earning above £50,000 pay only 2%.
Source: AJ Bell. Figures based on when the changes come into effect in 2029.
Remember: pension contributions will still offer significant tax advantages
“Although the new rules will impact the NI benefits of pensions salary sacrifice, they will not change the income tax advantages of paying pension contributions.
“From April 2029, the amount of salary employees exchange for a pension contribution may be reduced to £2,000, or some employers may stop offering pension salary sacrifice altogether. However, this doesn’t mean that employees can’t choose to simply increase their own personal pension contribution. In doing so, they can reduce their ‘adjusted net income’, pulling them out of higher rate tax or one of the many punishing tax traps, whilst also boosting their retirement savings.”
