33 million workers will be affected by contribution caps for salary sacrifice pensions

The government has disclosed more information about its contentious salary sacrifice cap on pension contributions

This is how you might be impacted by the changes.

Changes to the salary sacrifice on contributions will affect over three million pension savers.

Last month, Chancellor Rachel Reeves announced in her Autumn Budget a cap of £2,000 on the amount that employees and their employers can contribute to pensions through salary sacrifice before incurring National Insurance (NI) fees.

The Treasury is anticipated to receive £4.8 billion in 2029 - 2030 and £2.5 billion in 2030 - 2031 if NI relief on salary sacrifice is limited to the first 2,000.

That might be good for the country's finances, but according to a government impact assessment released this week, 3.3 million workers who use salary sacrifice to contribute to their pensions will be impacted and may have to pay more in taxes.

That is more than what the Autumn Budget document from just last week had previously estimated.

What adjustments have been made to pension salary sacrifice?

Employee pension contributions are frequently made through salary sacrifice.

Their net income is adjusted and funds are added to their pension fund from their gross pay. This lowers the payroll taxes that both employers and employees must pay.

According to government guidelines, the cost of the relief has significantly increased from 2.8 billion in lost National Insurance contributions in the 2016 - 2017 tax year to 5.8 billion in 2023 - 2024.

This is predicted to nearly triple to 8 billion by 2030/2031 if nothing changes.

A 2,000 salary sacrifice contribution cap will be implemented on April 6, 2029, to counteract this. Employers will be required to make Class 1 secondary NI contributions and employees will be required to make Class 1 primary NI contributions on any salary sacrificed for pensions over this cap.

Who will be impacted by changes in pension salary sacrifice?

According to government data, an estimated 7.7 million workers currently contribute to their pensions through salary sacrifice.

Of these, 3.3 million forfeit more than £2,000 in bonuses or salaries.

This indicates that while 56% of workers, or about 4.3 million people, are still covered by the 2,000 threshold, 44% of workers who use salary sacrifice for pensions would be affected by the changes.

But according to the Budget document, only 26% of people would be negatively impacted by the changes.

In the first year of effect, the average additional employee NI contribution liability is projected to be 84.

In order to lessen the impact of these changes, some people may try to lower their salary sacrifice pension contributions, according to the guidelines.

The document, however, makes no mention of the disincentive to increase pension contributions if doing so would result in a higher tax bill.

According to Nicholas Nesbitt, a private client partner at financial consulting firm Forvis Mazars, individuals making less than £50,270 may be disproportionately affected by this since they will have to pay 8% NI when they want to save well for the future. Higher earners, on the other hand, who make more than £50,270 per year, would only pay a two percent contribution fee. "Many companies pass on NIC savings as additional pension contributions for their employees, and eliminating these reliefs could further reduce employees' pension savings," he stated. However, a lot can change in four years, and although employees should prepare for these changes, the situation might be different by April 2029. The "

Furthermore, former pensions minister Steve Webb, a partner at consultants LCP, cautioned that if employers react to the change by reducing pension benefits for all employees, there may be more losers.

"A budget measure that was largely perceived as complicated and technical could have significant real-world implications for millions of workers," he stated. This change will exacerbate the country's severe under-saving issue.

According to the government's own estimates, employers will be more negatively impacted by the change due to their higher National Insurance Contribution rates, while approximately three out of seven employees who use salary sacrifice to fund their pensions will be negatively impacted.

"There is a chance that some employers will just reduce the generosity of their workplace pension offering, which would be a significant step backward, even though they have time between now and 2029 to think about their options. The "

Employers are encouraged to continue saving after 2029, but they still have a few years to contribute to their pension without any caps.

"Even though the NI savings are limited, what you pay in will still be exempt from income tax and workers can still enjoy pension tax relief up to their marginal rate of income tax," stated Laura Suter, director of personal finance at AJ Bell.

Furthermore, contributing to pension plans such as SIPPs will still lower your adjusted net income. This is crucial because it can increase your retirement savings and help you avoid paying higher tax rates or falling into one of the many harsh tax traps. A "