Salary sacrifice schemes, where employees give up part of their salary in exchange for higher pension contributions, have long been a tool for boosting retirement savings. However, these schemes have also disproportionately benefited higher earners, particularly those in higher tax brackets.
Now, the government aims to limit these benefits by introducing a cap that will reduce the potential tax advantages for wealthy workers and their employers. The cap is expected to raise billions for the Treasury, but its impact on pension contributions and employer costs could be significant.
The £2,000 Cap: What It Means for Employees and Employers
From April 2029, salary sacrifice contributions into pensions will be capped at £2,000 per year, exempt from National Insurance (NI) for both employees and employers. Any contributions above this threshold will be subject to both employer and employee NI, effectively treating them like regular pension contributions.
According to government estimates, this change is projected to raise an additional £4.7 billion in NI contributions by 2029. The Office for Budget Responsibility (OBR) notes that the costs associated with salary sacrifice pensions have been escalating, with the amount of relief provided set to more than triple from £2.8 billion in 2017 to £8 billion by 2030. The new cap aims to curb this growth, which the government has said is increasingly skewed towards higher earners.
The policy is expected to primarily affect high earners, such as those working in financial services, who have been able to sacrifice large portions of their income, including bonuses, without paying tax or NI. For example, a worker earning £125,000 could face an additional £585 in annual tax liability once salary sacrifice contributions exceed the £2,000 limit. Employers, too, will face higher NI contributions on these amounts.
However, the impact on most workers will be minimal, especially for those making modest pension contributions. For the majority, the cap will not significantly alter the benefits of salary sacrifice, which remains an effective way to save for retirement while reducing tax liabilities.
Aimed at Fairness: How the Cap Targets High Earners
The government’s new policy is seen as an attempt to make the pension system fairer and more sustainable. Currently, salary sacrifice allows higher earners to benefit disproportionately from tax breaks, as they are able to shelter a larger portion of their income from tax and NI by contributing to their pensions. The introduction of a £2,000 cap will reduce this advantage.
The greatest benefit of the current system goes to higher earners or those in financial services “who can put their bonuses into pensions tax-free,” said Chancellor Rachel Reeves in her Budget speech. “This is not sustainable for the public finances, putting pressure on the tax everyone else pays.” The cap is designed to ensure that middle and lower-income earners are not at a disadvantage in terms of tax relief, while still allowing pension saving benefits to remain accessible for the majority.
Reeves has framed the cap as a “pragmatic step,” aiming to protect low and middle-income workers from paying more tax while also securing vital funding for public services. Despite this, the changes are likely to be met with resistance, particularly from employers who may face higher costs as a result of the NI charges. Some experts, such as former pensions minister Steve Webb, suggest that the cap could lead to employers rethinking their pension schemes, potentially reducing the overall amount contributed to pensions.
As the April 2029 implementation date approaches, businesses and employees will have several years to adapt to the changes. The government’s hope is that the cap will help reduce pension inequalities while also ensuring that more money flows into public coffers. But, as with any tax change, the long-term impacts will only become fully clear once the policy is in action. For now, the £2,000 cap represents a significant shift in how the UK supports retirement savings, especially for high earners.
