Millions risk losing out under new pension salary sacrifice rules

From April 2029, pension contributions made through salary sacrifice above £2,000 a year will no longer be exempt from national insurance contributions (NICs) – a move announced in the Budget.

Salary sacrifice schemes, widely used by employers, allow workers to swap part of their pay for higher pension contributions, cutting NICs while keeping take-home pay steady and boosting retirement savings.

But under the new rules, any pension contributions sacrificed above £2,000 will be treated like ordinary pension payments and hit with both employer and employee NICs, slashing the tax advantage.

Former pensions minister Sir Steve Webb has now sounded the alarm, pointing to a new document from the Office for Budget Responsibility (OBR) suggesting the fallout could spread far wider.

Sir Steve says: “This was a huge Budget change that will force employers to rethink pay and pensions. The OBR makes clear the impact won’t stop at those contributing over £2,000.”

Millions already set to lose

Figures released by HM Revenue and Customs (HMRC) show around 3.3 million pension savers are already on course to be directly affected.

In total, 7.7 million employees currently use salary sacrifice to pay into their pension, with 3.3 million sacrificing more than £2,000 in salary or bonuses each year.

The OBR warned that how employers and workers respond is “highly uncertain”, opening the door to unintended consequences.

Warning: even those under £2,000 could be hit

Sir Steve, now a partner at consultants Lane Clark & Peacock (LCP), said the changes could backfire badly.

“Far from ordinary workers being ‘protected’, we could see millions of people on modest incomes losing out, further undermining their incentive to save into a pension,” he said.

He added that some workers contributing less than £2,000 could still lose out if employers respond by holding down future pay rises or reducing contractual salaries.

Employers may freeze pay or rethink pensions

The OBR noted that firms could try to recreate tax benefits by increasing pension contributions instead of wage growth, or by lowering base pay in exchange for higher employer pension payments.

It also highlighted the risk of costs being “passed through” to workers – affecting salaries, bonuses or pension generosity.

In some cases, employers may scrap salary sacrifice schemes altogether, hitting entire workforces rather than just higher earners.

Industry fears ‘new era of under-saving’

Daniel Gallon, head of taxation at the Association of British Insurers, said the changes could ripple across the workforce.

“The OBR’s analysis shows the impact could reach far more people than expected,” he said.

A survey by the ABI and Reba found 99% of businesses expect to be affected, with many bracing for extra admin, reduced benefits and pressure on pension contributions.

“It’s a clear warning sign that constant tinkering with the tax system risks opening the door to a new era of pension under-saving,” Mr Gallon added.

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A Treasury spokesperson defended the move, saying behavioural impacts were already factored in.

“Our reforms protect 95% of workers earning under £30,000 who use salary sacrifice, while tackling costs that were set to treble to £8 billion as high earners piled in bonuses tax-free,” they said.

But critics warn the real-world impact may be far broader – and that ordinary workers could pay the price.