In a significant move affecting workplace pensions, HM Revenue & Customs (HMRC) is set to introduce a new cap on salary sacrifice arrangements that will leave millions of workers unaffected.
Who Will Be Protected by the New Rule?
An official impact assessment from the tax authority reveals that around 4.3 million people will be fully shielded from the incoming changes. The proposed rule will place a £2,000 annual limit on the amount employees can sacrifice from their salary to boost their pension pot, a popular method that reduces National Insurance contributions for both worker and employer.
Government estimates indicate that approximately 7.7 million workers currently use salary sacrifice for pension contributions. Of this total, 56 per cent – equating to the 4.3 million figure – sacrifice less than the new £2,000 threshold and will therefore see no change to their arrangements.
The Potential Impact on Higher Savers
However, the analysis also uncovers a substantial group who will face new costs. The report found that 3.3 million workers (44 per cent of those using the scheme) currently sacrifice more than the £2,000 limit and will be impacted.
For these individuals, the average additional employee National Insurance contributions (NIC) liability is estimated to be around £84 in the first year the measure takes effect, which is the tax year 2029 to 2030. The government has stated that lower earners will be less affected, with the cap designed to "shield" 74 per cent of basic rate taxpayers who use salary sacrifice, while 26 per cent in this bracket would lose out.
Industry Warnings and Future Risks
Former Liberal Democrat Pensions Minister Steve Webb, now a partner at consultancy LCP, has issued a stark warning about the broader consequences. He stated that the change risks exacerbating the UK's under-saving problem and that the number of losers could grow if employers react negatively.
"On the government’s own estimates, around three in seven of the workers who use salary sacrifice to pay into their pensions will be hit by the change," Webb said. "Although employers have time between now and 2029 to consider their options, there is a risk that some will simply cut back on the generosity of their workplace pension offering, which would be a serious backward step."
The concern is that employers, who face a larger NICs hit due to their higher contribution rate, may respond by making pension provisions less generous for all staff, not just those exceeding the cap. This potential ripple effect underscores the delicate balance policymakers are trying to strike between tax revenue and encouraging long-term retirement saving.
