After years of Treasury murmurings, last week’s Budget finally pulled the trigger on a long-rumoured change: a new £2,000 cap on the National Insurance (NI) relief available through salary sacrifice.
From 2029, any pension contributions above that level will attract employee NI, effectively shrinking one of the most powerful tools for long-term saving.
The change has triggered a strong response from across the financial sector – not just because of its practical implications but because of the tension it creates with the Department for Work & Pensions’ (DWP) renewed focus on pensions adequacy.
The government should be looking to make it easier for people to invest in their pension, not harder
The feeling is that the move lands at exactly the wrong moment. While the government is asking workers to save more for retirement, it is simultaneously eroding one of the few incentives that meaningfully boost contributions.
In short, the DWP is pushing for higher saving, while the Treasury is pulling away the levers that help people do it. Salary sacrifice has often been seen as a bridge between the two.
Uneven impact
The impact will fall unevenly. Workers earning around £40,000 who sacrifice at least 5% of pay are likely to be caught; those in the £100,000−£125,140 band ─ already grappling with the personal-allowance taper ─ face further pressure.
Because defined benefit schemes rarely use salary sacrifice, the strain will be disproportionately felt by private-sector DC savers, widening an already significant divide.
Employers will also be uneasy. After the previous Budget raised employer NI contributions, many firms — particularly SMEs — leaned on salary sacrifice as a way to contain rising employment costs without cutting investment or jobs.
Engaging with one’s pension for the first time might manifest itself in, for example, ceasing contributions
Capping or curtailing the mechanism now risks pushing those costs higher again. That could translate into recruitment pauses, smaller or delayed pay rises, or even redundancies, not to mention the additional administrative complexity to rework payroll systems, benefit structures and contribution models.
It’s not all doom and gloom, however. In fact, some see this as the least damaging of the options the Treasury considered. A cap preserves NI relief up to £2,000 rather than abolishing it altogether, and the long lead time to 2029 does give advisers and clients a window to plan.
(Expect a surge in salary sacrifice contributions between now and then as individuals rush to bank the benefit while they can.)
Still, the unease is palpable, especially among advisers who now have the job of explaining yet another policy change to clients. The challenge is not just technical but behavioural. And this is where the voices of advisers and industry thinkers ring loudest.
People will realise on 1 May 2029 that their take-home pay is less than it was on 1 April
For Succession Wealth’s Paul Langley, the cap clearly affects higher earners most.
“The more you earn, the more you’re going to pay. And that’s the problem — it’s punishing higher earners, because they’re also more likely to pay into a pension,” he says.
He illustrates the dividing line starkly: someone earning £35,000 and sacrificing 5% stays below the cap; at £60,000 and 6%, the same behaviour pushes £1,600 over it.
PIMFA head of public affairs Simon Harrington believes the bigger risk lies in the cumulative effect of pension-policy tinkering. Only around 30% of people are meaningfully engaged with their pensions, he notes, and sudden engagement isn’t always positive.
“Not all engagement is good,” he says. “Engaging for the first time might manifest itself in, for example, ceasing contributions.”
The more you earn, the more you’re going to pay. And that’s the problem — it’s punishing higher earners
Harrington also argues that the narrative that frames salary sacrifice as a loophole for the rich misses the reality. Lower earners often use it unknowingly via auto-enrolment schemes, meaning many will discover the impact only when the cap takes effect.
“People will realise on 1 May 2029 that their take-home pay is less than it was on 1 April,” says Harrington. “That will have a damaging impact on people’s financial resilience [and] might lead them to question what they do with respect to pension contributions in the longer term.”
Crucially, he sees the policy as inconsistent with the government’s wider pension ambitions. The DWP’s adequacy review and the expected recommendations from a new Pensions Commission aim to increase contributions, yet Treasury policy now makes contributing less rewarding.
“We think the most damaging of these proposals will be a reduction in pension contributions at a time when the government should be looking to make it easier for people to invest in their pension, not harder,” concludes Harrington.
Conflicting narrative
For advisers, that conflicting narrative is likely to shape client conversations for months, if not years.
This may lead people to question what they do with respect to pension contributions in the longer term
They will need to assess which clients are exposed, balance short-term optimisation against long-term planning and prevent knee-jerk reactions – whether that’s panic saving or disengagement.
Harrington warns that the burden may fall increasingly on employers rather than pension providers, as disengaged employees email HR rather than seek formal advice.
The salary sacrifice cap may not be the most dramatic pension change of recent years but it is one that prompts a deeper question: can the UK meaningfully improve pension adequacy while simultaneously weakening the incentives that encourage people to save?
Tom Browne is editor of Money Marketing
