HMRC estimates more than 2.8 million people could cut their pension contributions once the salary sacrifice cap is introduced in April 2029. Though this is guesswork and the Office for Budgetary Responsibility has warned that the behavioural impact of the new cap on pension saving is highly uncertain.
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 the same time, the Pension Commission has estimated that 15 million people are currently under-saving for retirement.
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 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.
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%.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
