Chancellor Rachel Reeves has delivered a significant blow to workplace pension savings in the Labour government's second Autumn Budget, confirming a new cap on salary sacrifice arrangements that experts warn could sound the death knell for the popular scheme.
What is the salary sacrifice pension cap?
On Wednesday, November 26, the Chancellor confirmed that salary sacrifice will be capped at £2,000 annually, dramatically reducing the tax efficiency of these arrangements. The move, described by financial professionals as a 'pension salary sacrifice raid', is expected to raise an additional £4.7 billion for the Treasury by limiting National Insurance advantages previously enjoyed by both employees and employers.
Salary sacrifice schemes have been a legitimate and effective method for employees to boost their retirement savings while helping employers save on National Insurance contributions. Under these arrangements, employees agree to reduce their salary in exchange for higher employer pension contributions, resulting in tax and National Insurance savings for both parties.
Impact on businesses and recruitment
Simon Thomas, managing director and chartered accountant at Ridgefield Consulting, argued that these schemes have been vital for businesses operating with tight margins. "These schemes don't just benefit employees saving for retirement; they are also vital to employers," he said.
"For many growing businesses and start-ups that cannot yet compete on headline salaries, enhanced pension contributions through salary sacrifice form a crucial part of how they attract and retain talent."
The £2,000 cap has significantly reduced the tax efficiency and will make these schemes far less attractive, potentially leading many businesses to scrap them entirely. Combined with the recent rise in employer National Insurance, this could place additional pressure on businesses already managing tight margins and may ultimately weaken their ability to recruit competitively.
Small businesses face difficult decisions
Kate Underwood, founder and chief people strategist at Southampton-based Kate Underwood HR and Training, confirmed the move would disproportionately affect small businesses. "For a lot of us, pension salary sacrifice has been one of the only ways to keep the numbers vaguely sensible," she explained.
"Wages are up, business rates are up, energy has been a nightmare, and now employers will pay more National Insurance on anything over the cap. That 'little tweak' is yet another extra cost dumped on top."
While most small businesses won't immediately start dismissing staff because of this single change, Underwood predicts they will think twice before hiring new employees. The consequences are likely to include recruitment pauses, slower replacement of departing staff, and reductions in hours or perks offered to current employees.
"It also makes it harder to attract experienced people," Underwood added, "because you have just lost one of the few tools you had to put together a decent package without blowing the budget. On its own, it is not a crisis. Added to everything else, it really stings."
Anita Wright, chartered financial planner at Ribble Wealth Management, summarised the situation as a significant shift in pension policy that will affect both retirement planning and business competitiveness across the UK.
