UK households are being advised to take two crucial financial steps following a significant pension change announced in the Labour Party's Budget. The reform will see the amount exempt from National Insurance for employee pension contributions made via salary sacrifice capped at £2,000 per year, effective from April 2029.
Understanding the Impact on Savers
According to Andrew Prosser, Head of Investments at InvestEngine, the change will have a varied impact. For an individual earning £40,000 and contributing 5% of their salary, the effect is minimal as they remain "well within the limit."
"But for higher earners, the impact is bigger and over decades, and when taking into account compounding investment growth, it can significantly reduce someone's retirement pot," Prosser warned. He also noted that employers may scale back their contributions, delivering a further blow to long-term savings.
Expert-Recommended Moves to Counteract the Change
To mitigate the effects of the new cap, financial experts are urging proactive planning. Andrew Prosser's first recommendation is for individuals to review their workplace pension and maximise employer contributions wherever possible. Secondly, he suggests considering topping up pensions using any remaining annual allowance.
He also proposed a strategy for couples, advising that spouses and civil partners can coordinate their allowances and investments to shelter more income from tax, thereby providing a joint buffer to protect their combined retirement savings.
Broader Concerns for Employees and Businesses
Kevin Fitzgerald, UK Managing Director of Employment Hero, highlighted wider concerns. He stated that while capping salary sacrifice contributions might raise short-term government revenue, it poses a longer-term risk by discouraging pension saving at a time when people already struggle to put enough away.
"This will be concerning to older employees who are already facing a tough landscape when it comes to the job market," Fitzgerald added.
He also pointed to the administrative burden on businesses, explaining that payroll will become more complex as National Insurance will need to be applied differently above the cap. "It won’t be straightforward, which will add yet another admin burden on top of payroll teams," he said, emphasising that small businesses in particular need clarity and support.
Fitzgerald concluded that the policy risks failing to support either business efficiency or employee future security, stating: "Small businesses need clarity, and employees need support in planning for their futures while continuing to work and contribute, this move risks achieving neither of those things."
