A significant shift in pension saving behaviour is expected across the UK following a major tax rule change announced by the government. New research indicates that around one in ten households plan to reduce their pension contributions after reforms to salary sacrifice arrangements take effect.
What is Changing with Salary Sacrifice?
The changes were announced in the Labour Party's Autumn Budget. From April 2029, salary-sacrificed pension contributions that exceed an annual threshold of £2,000 will no longer be exempt from National Insurance (NI) contributions.
Under the new system, contributions above this £2,000 limit will be treated as ordinary employee pension contributions for tax purposes. This means both employees and employers will be liable to pay National Insurance on the amount exceeding the cap, removing a key financial incentive for this popular savings method.
Warning of a "Knowledge Gap" and Falling Savings
Pensions experts have raised the alarm that the reforms could severely undermine retirement planning. Matthew Blakstad, deputy director of strategic policy and research at Pensions UK, warned of a stark "knowledge gap" regarding the impending changes.
"Salary sacrifice works. It helps people save more for the retirement they want while maintaining take home pay," Blakstad stated. He expressed concern that widespread confusion "risks undermining positive saving behaviours and confidence in the UK pension system."
The research, conducted by Yonder Consulting in December among over 1,500 non-retired people, found that the anticipated drop in contributions is a direct response to the policy shift. Blakstad further cautioned that employers would also have fewer incentives to increase their contributions above the legal minimum, potentially leading to "smaller pension pots at retirement."
Government Defence and Industry Backlash
The Treasury has defended the reforms, arguing they are necessary for fairness. A spokesperson stated: "Salary sacrifice costs were set to treble to £8 billion as high earners piled in huge bonuses without paying a penny in tax – a taxpayer-funded perk largely benefiting the better off."
They emphasised that the changes "protect 95% of workers earning under £30,000" who use salary sacrifice, while allowing unlimited saving with unchanged tax relief on employer contributions.
However, the financial industry strongly disagrees. Justin Wray, assistant director and head of long-term savings policy at the Association of British Insurers (ABI), criticised the move. "Pensions are an essential means for people to save for their retirement. They should not be used as a short-term revenue-raiser by government," he said.
Wray highlighted the contradiction of restricting salary sacrifice when official calculations show millions are under-saving. "This double whammy puts us at risk of an even greater retirement crisis," he concluded, warning of increased complexity for employers and smaller retirement incomes.
The debate sets the stage for a significant clash between government fiscal policy and the long-term goal of ensuring adequate retirement savings for the UK population.
