- Money
Capping salary sacrifice for pension saving has been described as ‘a short-sighted tax grab which will lower pension saving.’
Vicky ShawWednesday 26 November 2025 17:51 GMT
open image in galleryWorkers saving into a pension nowadays are often bearing the risk as to how much money they will end up with in retirement (picture posed by model/Lucy North/PA Archive) (PA Archive)
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A £2,000 salary sacrifice cap on pensions, announced in the Budget, is a “tax penalty on people trying to do the right thing”, a pension expert has said.
Here is a look at how salary sacrifice schemes work and how they will change under a shake-up unveiled in the Budget:
– What are salary sacrifice schemes?
They allow people to “give up” a chunk of their salary for a different benefit from their employer.
Employers may offer salary sacrifice as part of their pension scheme as a tax efficient way to help workers boost their pots.
When someone pays into a pension using salary sacrifice, the employer will pay the whole amount into the employee’s pension, including the employer’s contribution.
– What changes have been announced?
From April 2029, only the first £2,000 of employee pension contributions through salary sacrifice each year will be exempt from national insurance contributions (NICs).
Employers and employees can still make contributions above £2,000 through salary sacrifice arrangements.
But employees, as well as employers, will pay NICs on the amount above £2,000 for employee contributions through salary sacrifice.
– Do employees need to contact HM Revenue and Customs (HMRC)?
Employees will not need to contact HMRC – employers will make the changes needed, so that NICs apply to contributions above £2,000.
– What are the benefits of salary sacrifice schemes?
Salary sacrifice enables people to maintain their take-home pay, as people end up paying lower NICs.
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There are also NI advantages for employers, helping them to offer more generous workplace benefits.
– What has the pensions industry said about the changes?
The Association of British Insurers (ABI) described capping salary sacrifice for pension saving as “a short-sighted tax grab which will lower pension saving and undermine people’s retirement security”.
The ABI also said the move conflicts with the ambition to increase scale in pensions to drive more investments into UK businesses and infrastructure.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said: “Restricting the amount of someone’s salary that can be sacrificed to £2,000 a year will make people feel that bit poorer and we could see less going into pensions as a result.
“As an example, a worker earning £50,000 who saves 5% of their salary would miss out on savings of £40 per year.”
Gary Smith, senior partner and retirement specialist at wealth management firm Evelyn Partners, said the cap “throws a spanner into the works of private sector pensions, adding: “Restricting salary sacrifice is a tax penalty on people trying to the right thing by saving efficiently for their own retirement.”
– What has the Government said?
It has said that the costs of relief through salary sacrifice relate disproportionately to pension contributions from people on higher incomes.
It has said the changes make the system fairer and more sustainable, and means that any salary sacrificed above the £2,000 cap is treated the same way for tax purposes as other pension scheme arrangements.
– Are there any downsides for pension savers from using salary sacrifice?
A lower salary on paper might affect some borrowing applications, such as for mortgages. However, employers can maintain a “reference salary,” which may be considered.
– What issues already exist with people’s incomes and pension saving?
Many people are already thought to be heading for a tough retirement financially and facing a sharp drop in their living standards when they stop work.
Although automatic enrolment has brought millions of people into pension saving, there are fears that too many workers are not saving enough to give themselves a comfortable retirement.
Workers saving into a pension nowadays are often bearing the risk as to how much money they will end up with in retirement, depending on factors such as how much they and their employer contribute and investment performance. Pensions which promise savers a salary-based payout in retirement have become much less common in the private sector, putting the burden on the individual saver.
Cost-of-living squeezes in recent years have also had an impact on people’s ability to save into a pension, and workers are already seeing their incomes squeezed by frozen income tax thresholds, dragging people into higher tax bands.
– Putting salary sacrifice issues aside, what about incomes for current pensioners?
Some 13 million pensioners are set to see their state pension increase faster than inflation next April, due to the triple lock used to calculate state pension increases.
Under the triple lock guarantee, the state pension increases every April in line with whichever is the highest of total earnings growth in the year from May to July of the previous year, Consumer Prices Index (CPI) inflation in September of the previous year, or 2.5%.
Next year’s 4.8% increase – in line with wages – means that people receiving the full new state pension could get £241.30 per week – or around £12,548 per year.
Those on the full basic state pension could see their weekly payment rise to around £184.90.
Many pensioners do not receive the full state pension.
