- A recent Freedom of Information request shows HMRC estimate over 2.8m pension savers will reduce their pension contributions once the pension salary sacrifice cap is introduced in April 2029
- Over three quarters of those (2,222,0000) will be earning above £50,270
- The Office of Budget Responsibility (OBR) estimated that the new cap would raise £4.9bn in 2029-30 and £5.1bn in 2030-31
- However, the OBR also said that the behavioural response to the change is highly uncertain, given the various ways employers and employees can respond, and this should be factored into consideration
- The IFS has estimated that 15% of pension savers would be affected by the new cap
- The Pension Commission recently published its interim report stating that 15m people in the UK were under saving for retirement
Rachel Vahey, head of public policy at AJ Bell comments:
“This new pension rule risks creating more confusion than clarity. HMRC estimates more than 2.8 million people could cut their pension contributions once the salary sacrifice cap is introduced. But it’s doubtful how much these figures can be relied upon with the OBR warning that the behavioural impact of the new cap is highly uncertain. That should set alarm bells ringing – it shows the government isn’t able to predict how the change will impact pension saving.
“This is not a simple case of higher earners taking the biggest hit. In some cases, people earning £50,000 could lose more than those on £55,000 because of the way national insurance thresholds work. That makes the change harder to explain and harder for savers to navigate.
“Employers and employees may also respond in very different ways in the run up to April 2029. Some employers may simply decide to formalise the current salary sacrifice arrangements by increasing pension contributions in place of wage growth. This makes forecasting the real outcome even more difficult.
“At a time when the Pension Commission has estimated that 15 million people are currently under-saving for retirement, the government should be focused on making pensions easier to understand and more rewarding to save into, not adding another layer of complexity that risks people saving less and ending up worse off in later life.
“The crucial thing for people to understand is that pension saving is still critical and you’ll be getting the benefit of income tax relief and employer contributions on your pension, which are the big incentives to put money in. Limiting salary sacrifice is a blow for pension savers but not the end of the world. The bigger long-term impact is really on employers, since the overall cost of employing someone and paying into their pension is going up.
What should people do now?
“Saving into a pension is still one of the best ways to build long-term financial security, and that isn’t going to change once salary sacrifice rules are capped from April 2029. While the cap may slightly reduce the national insurance savings available on sacrificed salary above £2,000 a year, for most people pensions will continue to offer strong long-term benefits, especially given the power of employer pension contributions and tax advantages on offer from the government.
“For most savers, the effect of the cap will be relatively small, and salary sacrifice will still be a helpful way to boost retirement savings. Someone earning £40,000 and exchanging 6% of their salary for an employer contribution will see their take-home pay fall by £32 from April 2029. But they will still be enjoying national insurance savings of £160 on a £2,000 pension contribution.
“The most important thing people can do is make sure they’re taking full advantage of what their employer already offers. Check whether salary sacrifice is available, whether you’re enrolled, and whether your employer also adds their national insurance savings into your pension too.
“Even with the cap coming in, workplace pensions remain a really powerful way to save for the future and one that people should continue to use with confidence. Pension contributions will still be exempt from income tax and workers can still enjoy pension tax relief up to their marginal rate of income tax. More so, making pension contributions to schemes like SIPPs will still reduce a taxpayer’s ‘adjusted net income’, pulling them out of higher rate tax or one of the many punishing tax traps while also boosting their retirement savings.”
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.
