Some pension savers will be affected by the amount of money they can put into their pensions without paying national insurance (NI), under measures announced in the Budget.
From 2029, there will be a limit of £2,000 per year that can be shielded from employer and employee NI contributions through a method called salary sacrifice.
There is currently a much higher limit on the amount a worker can accept their employer to pay, and the scheme is seen as a way to encourage workers to contribute to their pensions.
The measure will raise £4.7bn in additional contributions to NI in 2029, the Office for Budget Responsibility (OBR) estimated.
Salary sacrifice allows workers and employers to agree an amount that will be deducted from the salary and transferred into a pension before the salary is affected by National Insurance Contributions (NICs) and income tax. Workers “sacrifice” a higher salary, but receive a tax-free sum into their pool with each paycheck.
Chancellor Rachel Reeves said the current system favors high earners and those working in financial services, “who can put their bonuses into tax-free pensions”.
The £2,000 cap on salary sacrifice was a “pragmatic step”, Reeves said, and would mean people on low and middle incomes could continue to use the scheme “without paying more tax”.
The pay sacrifice policy also reduces the total amount of employers’ National Insurance Contributions (NICs) paid by businesses, so any cap will mean a higher NIC bill for businesses or a rethink about whether they offer the benefit.
The cap will mean salary sacrifice contributions over £2,000 will trigger NICS for both staff and businesses. Workers who pay income tax at the basic rate will pay NICS at a rate of 8%, while higher rate taxpayers will pay 2%. Employers pay NICs a 15% rate.
Around a third of private sector employees and a tenth of public sector workers use a salary sacrifice scheme for their pension savings. Analysis by HM Revenues & Customs suggested around 7.7 million employees used it in 2024.
Former Pensions Minister Steve Webb, now a partner at LCP, said the time until National Insurance payments fall due due to salary sacrifice – more than three years – means the chancellor is unlikely to raise the £4.7bn the OBR estimates.
“The decision not to implement this change until 2029 creates a huge opportunity for companies to restructure the way they offer salaries and pensions to mitigate or eliminate this new charge,” Webb said.
“There is a high probability that this policy will only raise a fraction of the amount expected by the Chancellor.”
