With new salary sacrifice rules on the horizon from the Labour government, a leading financial expert has outlined three clear steps that could save individuals thousands of pounds. Antonia Medlicott, Founder and Managing Director of finance education specialists Investing Insiders, provides crucial guidance for navigating the upcoming changes.
Understanding the £2,000 Salary Sacrifice Cap
The proposed change, set by Chancellor Rachel Reeves, will introduce a cap on the amount of salary sacrifice pension contributions that benefit from National Insurance Contributions (NICs) relief. The key limit is set at £2,000 per year. However, Medlicott emphasises that this is not a cap on total pension contributions, but specifically on the amount that can be contributed without incurring NICs.
Importantly, this new rule will not come into effect until April 2029, providing a significant window of opportunity. "There’s no reason not to make the most of the scheme before then," advises Medlicott.
Who Will Be Affected and Who Won't
The expert clarifies that the cap is targeted at higher earners. Around 75% of people using salary sacrifice will not be affected. For context, someone earning the UK average salary of £37,000 could contribute up to 5% (£1,850) annually via salary sacrifice and remain below the £2,000 threshold.
It is vital to distinguish between different pension types. Nothing is changing for personal pensions or standard workplace pension contributions where tax is already deducted from your payslip. These continue to receive full income-tax relief, though they do not offer NICs relief outside of a salary sacrifice arrangement.
"Salary sacrifice is a different scheme, which some employers offer, and which employees can sign up to if they choose," Medlicott notes, highlighting that workplace pensions remain beneficial due to employer contributions.
Strategic Steps for Tax Planning Before 2029
For those using salary sacrifice to manage their taxable income—for instance, to avoid the Child Benefit taper at £60,000 or the loss of the Personal Allowance at £100,000—planning is essential. Medlicott suggests the following actions:
Firstly, maximise contributions before April 2029. Utilise the current unlimited NICs relief while it lasts. Remember, the annual pension allowance is £60,000 or 100% of earnings (whichever is lower), with potential to carry forward unused allowances from the previous three years.
Secondly, review your overall income strategy. If pension contributions have been your primary method for reducing taxable income, you may need to explore other avenues before the cap takes effect.
Finally, understand the exemptions. Some schemes remain entirely exempt from income tax and NICs, and some salary sacrifice benefits are taxed as a 'benefit in kind', making the NICs exemption irrelevant anyway.
By taking these steps now, individuals can potentially save thousands and build a more resilient financial plan ahead of the 2029 changes.
