Chancellor Rachel Reeves is set to impact the retirement plans of millions of workers with a significant change to pension tax rules, new figures reveal.
The New Pension Contribution Cap
The Labour government has confirmed that Budget changes will apply National Insurance to salary sacrifice pension payments above £2,000 annually. The Treasury's assessment indicates that approximately 7.7 million employees currently use these arrangements to boost their pension pots. Of this total, an estimated 3.3 million workers (around 42%) contribute more than the new threshold and will therefore be affected by the change.
The policy is scheduled to take effect from 2029, a timeline the Chancellor says is designed to give individuals and employers time to adjust. Under salary sacrifice, employees give up part of their salary in exchange for a larger pension contribution from their employer, saving on both income tax and National Insurance.
Industry and Political Reaction
The announcement has drawn sharp criticism from pensions experts and former ministers. Sir Steve Webb, former Liberal Democrat Pensions Minister and now a partner at consultants LCP, stated: "At a time when the nation as a whole has a significant 'under-saving' problem, this change will make matters worse."
Steve Hitchiner, Chair of the Tax Group at the Society of Pensions Professionals, echoed these concerns, calling it a "tax on working people, in spirit if not in name." He warned that abolishing the full benefit of salary sacrifice for pensions will affect the take-home pay of millions, particularly basic rate taxpayers. He added that it imposes a "sizeable cost to employers" and, crucially, "its removal will reduce pension saving."
Chancellor's Justification and Disproportionate Impact
Defending the move, Chancellor Rachel Reeves argued the current system is "not sustainable for the public finances, putting pressure on the tax everyone else pays." She stated the £2,000 cap is a "pragmatic step" to ensure people on low and middle incomes can continue using salary sacrifice without paying extra tax.
However, analysis suggests the financial impact will be felt unevenly. The change disproportionately affects lower earners because employee National Insurance is charged at 8% on most wages, but drops to just 2% on income exceeding £50,270. This means those earning below the higher rate threshold will bear a larger relative cost compared to top earners when the NI saving is removed on contributions above the cap.
The debate sets the stage for a significant shift in retirement planning, with millions now needing to reconsider their savings strategy ahead of the 2029 implementation.
