Workers across the UK are being urged to review their pension strategies following the Government’s latest budget proposal. A new cap on salary sacrifice contributions that benefit from national insurance relief is scheduled to take effect in April 2029.
While the Treasury says the move will help rebalance tax benefits, industry experts warn it could discourage long-term retirement saving, especially among younger earners. The added complexity also adds pressure on employers to update payroll systems and on individuals to reconsider their pension plans.
National Insurance Relief to Be Capped from April 2029
Chancellor Rachel Reeves’ decision to limit national insurance savings on salary sacrifice pension contributions to £2,000 annually marks a notable shift in pension tax policy. According to the Autumn Budget, the change is designed to “ensure fairness in the tax system” but is expected to raise £4.7 billion in its first year and £2.6 billion the following year.
Currently, salary sacrifice arrangements allow employees to reduce their gross income by contributing more to their pensions, thereby lowering their income tax and national insurance liabilities. Both employers and employees benefit from the arrangement. However, under the planned reform, only the first £2,000 of such pension contributions will be exempt from national insurance, with contributions above that threshold taxed at the standard 8% rate for basic-rate earnings and 2% at higher thresholds.
This could significantly affect higher earners or those who proactively contribute more than the minimum requirement. Jason Murphy, co-founder of the fintech pension platform Chest, stated: “Working people are already feeling the cost of living pressures, and these changes mean many will end up paying a bit more.”
Although the measure won’t take effect until 2029, advisers are encouraging employees to maximise the existing benefit in the coming years. “Salary sacrifice remains one of the most efficient ways to reduce your tax bill today,” said Ali Adam, another co-founder at Chest. He advises workers to check with their employers whether enhanced contribution schemes are available and to consider raising their own input while the current rules still apply.
Five Practical Steps to Safeguard Retirement Savings
In light of the proposed cap, financial experts are advising savers to adopt a more active role in managing their pensions. According to Chest, one of the key strategies involves cutting down fees associated with pension funds. Auto-enrolment workplace pensions are subject to a 0.75% fee cap, but older schemes can still charge between 1% and 1.5%. Comparing providers and seeking lower-cost alternatives can make a measurable difference over time.
Savers should also assess whether their investment choices match their life stage. Most workplace pensions default to a one-size-fits-all fund, which may not align with individual risk profiles or retirement goals. Murphy explained that younger savers might prefer higher-growth options, while older employees may wish to reduce exposure to market volatility.
Lost pension pots are another concern. According to the Pension Policy Institute, approximately 3.3 million pensions remain unclaimed, equating to £31 billion in value. The Government’s free Pension Tracing Service can help locate these funds, potentially boosting retirement income significantly.
Tax relief is another key consideration. Basic-rate tax relief is applied automatically, but higher-rate taxpayers may need to claim additional relief through self-assessment. Being proactive about this could enhance pension savings by up to 20% more.
Lastly, while the salary sacrifice cap is years away, individuals should make the most of current allowances. Reviewing and possibly increasing contributions now could yield substantial long-term benefits, particularly for those whose employers offer to match contributions beyond the legal minimum.
