UK households are being strongly advised not to abandon valuable salary sacrifice arrangements for their pensions, despite a new rule that will cap the National Insurance benefits. The warning follows Chancellor Rachel Reeves's Autumn Statement, delivered on November 26, which outlined significant tax changes.
The £2,000 Cap and Its Impact
Financial services firm AJ Bell has highlighted a key change buried in the Budget details. From April 2029, the National Insurance perks gained from using salary sacrifice for pension contributions will be limited to £2,000 per year. This move is part of a wider package of tax increases unveiled by the Chancellor, which AJ Bell notes largely targets savers, investors, and workers.
Government data indicates this change will have a substantial reach. An estimated 7.7 million employees currently use salary sacrifice for their pensions. Of these, 3.3 million sacrifice more than £2,000 of their salary or bonuses, meaning around 44% of users will be directly impacted. This contrasts with the government's own estimate that just 26% would lose out. For those affected, the average additional employee National Insurance liability in the first year is projected to be £84.
Why Experts Say 'Don't Stop Contributing'
Despite the new cap, the message from AJ Bell is clear: "But whatever you do, don’t stop your pension contributions." Laura Suter, Director of Personal Finance at AJ Bell, explained that while tax hikes are coming, there are still smart ways to mitigate their impact.
The firm emphasises that salary sacrifice remains highly beneficial for two major reasons:
- Income Tax Exemption: Payments into your pension are still exempt from income tax.
- Pension Tax Relief: Workers continue to receive pension tax relief at their marginal rate of income tax.
Furthermore, making contributions into schemes like Self-Invested Personal Pensions (SIPPs) reduces your 'adjusted net income'. This can be crucial for pulling you out of higher tax brackets or avoiding other tax traps, all while building your retirement pot.
Navigating the New Tax Landscape
Laura Suter advised that "making smart moves before some of the changes come in place, while also getting the most out of the tax breaks that remain, will put you on good financial footing to weather the storm." AJ Bell has consequently issued a nine-point plan to help individuals 'Budget-proof' their finances as much as possible against the announced changes.
The core takeaway for millions of UK workers is to look beyond the headline cap. While the National Insurance saving will be limited for higher sacrificers, the combined benefits of income tax exemption, tax relief, and income adjustment continue to make salary sacrifice a powerful tool for long-term financial health and retirement planning.
