Changes to Pension Savings in Upcoming Budget

The recent Budget announcement will change how much pension savers can contribute to their pensions without incurring National Insurance (NI) payments. Starting in 2029, there will be a £2,000 annual cap on contributions made through a method called salary sacrifice, which helps both employers and employees avoid extra NI costs.

Currently, workers can agree on higher contributions with their employers, which is intended to encourage more savings into pensions. The Office for Budget Responsibility (OBR) predicts that this new cap will generate an extra £4.7 billion in NI funding by 2029.

Under salary sacrifice, workers can choose to have a portion of their salary deducted and placed into their pension before taxes apply. While they sacrifice a more substantial salary, they enjoy tax-free contributions with each paycheck. Finance Minister Rachel Reeves pointed out that the existing system currently benefits high earners in financial services who can utilize their bonuses for pension savings without tax implications.

Reeves described the £2,000 cap as a “pragmatic measure,” aiming to ensure that lower- and middle-income earners can still benefit from the scheme without facing increased tax burdens. However, by establishing this cap, businesses may find themselves needing to either raise their NI contributions or rethink the benefits they provide.

Any salary sacrifice above the £2,000 limit will be subjected to NI contributions for both employees and employers. For workers in the basic tax bracket, the NI rate is set at 8%, while higher-rate taxpayers incur a 2% charge. Employers are responsible for a 15% NIC rate.

Currently, around a third of private sector workers and about ten percent of public sector workers use salary sacrifice schemes for their pension savings. An analysis by HM Revenue and Customs indicated that roughly 7.7 million employees participated in these schemes in 2024.

Steve Webb, a former pensions minister and now a partner at LCP, mentioned that there is over three years before these NI changes take effect, which may lessen the likelihood that the chancellor will surpass the OBR’s anticipated £4.7 billion revenue increase. He noted that the delay could allow businesses the chance to adjust their pay and benefits plans to mitigate this new burden.

However, Webb cautioned that the expected revenue from this policy might only be a fraction of what the Prime Minister had hoped.

Baroness Ros Altmann, another ex-pensions minister, criticized the current salary sacrifice system as “opaque,” highlighting that the agreements made between individual companies and employees could become even more complicated with the proposed changes. She raised concerns that employers might face increased NI costs, leading to potential decreases in take-home pay and heightened administrative expenses from modifying pension schemes.

Altmann expressed doubt, suggesting that employers might decide the administrative burden isn’t worth it, potentially eliminating the salary sacrifice option entirely. “Overall, I believe this could negatively impact savings growth in the UK,” she concluded.

Others in the pension industry warned that removing these tax breaks might lead companies to reduce planned salary raises and lower total pension contributions. “We’re hopeful employers will manage their contributions wisely,” stated Alex Foster, a partner at Brick Rotenberg.