Under the plans, only the first £2,000 a year you put into your pension through salary sacrifice will be exempt from National Insurance (NI). Fresh analysis from the Office for Budget Responsibility (OBR) suggests the effects may not be limited to those directly affected by the cap.
Here, Which? explains what's changing and highlights seven things you should consider ahead of the changes in April 2029.
What’s changing for salary sacrifice in April 2029?
From April 2029, if an employee makes pension contributions via salary sacrifice, they will pay the full rate of NI on any amount above £2,000: 8% on a salary of less than £50,270 and 2% on income above this.
HMRC estimates that 7.7 million employees currently use salary sacrifice for pensions – around 30% of private-sector employees and 10% of public-sector employees. Around 3.3 million contribute more than £2,000 a year and will be directly affected by the cap.
Find out more:Why does the OBR think more workers could be affected?
The OBR says the ‘behavioural response’ to the measure is ‘highly uncertain’ and sets out several ways employers and employees could react.
Employers could restructure pay and pensions
It expects some businesses to look for ways to limit the new NI cost by changing how they structure pay and pensions. Instead of using salary sacrifice, employers could lower future pay growth and increase standard employer pension contributions instead.
Traditional employer pension contributions remain exempt from NI, so this approach could reduce the impact of the cap.
However, the OBR notes that such changes may need to apply across the workforce. That means employees contributing less than £2,000 could still see slower pay growth as employers adjust.
Find out more:More workers could move to 'relief at source' schemes
It also expects the cap to push some employees towards relief at source pension schemes. Under these schemes, higher and additional-rate taxpayers must claim back extra tax relief through self-assessment.
It estimates that around 10% of this additional relief could go unclaimed if people fail to complete the paperwork or are unaware they need to. That would increase tax receipts permanently, even though the policy itself doesn't change income tax relief on pensions.
Find out more:Employers may pass on costs
The OBR assumes that around three quarters of the additional employer cost will ultimately be passed on, largely through lower wages and, to a lesser extent, lower employer pension contributions.
If that happens, employees contributing less than £2,000 could still feel an indirect impact through slower wage growth.
Some people may reduce their pension contributions
The OBR thinks that 80% of affected defined contribution scheme members will reduce their pension contributions in response to the cap. It models lower earners cutting contributions by around 2.75% and higher earners by 1.8%.
While this could increase take-home pay in the short term, the OBR estimates it would raise around £100m a year in extra tax, as more income would be taken as salary and therefore subject to income tax and NI.
How will it affect take-home pay?
As it stands now, the impact on most employees' monthly take-home pay is likely to be small.
Under the new rules, only contributions above £2,000 a year will attract employee NI. That means someone earning £40,000 and contributing 5% of their salary would not be affected, as 5% is £2,000.
Research from Vanguard suggests that for someone on a £50,000 salary, contributing 5% (£2,500 a year), the change would reduce take-home pay by around £40 a year, or about £3.30 a month. Someone earning £80,000 and sacrificing 10% would see their take-home pay fall by around £120 a year, or £10 a month.
However, the effect can be more noticeable for graduates who are repaying student loans.
Salary sacrifice reduces your official salary for payroll purposes. That means you currently pay less employee NI and, if you have a student loan, lower repayments as well.
Once the £2,000 cap is introduced, contributions above that limit will no longer reduce NI. For a graduate contributing £5,000 a year through salary sacrifice, around £3,000 would fall above the cap. At current rates, that could mean roughly £240 more in employee NI and about £270 more in student loan repayments – a total of around £510 a year.
Find out more:Is salary sacrifice still a good way to save?
Even with new changes coming, using salary sacrifice is still a very good way to save for the future.
Pension contributions made through salary sacrifice will continue to benefit from income tax relief in the same way as now. The first £2,000 you sacrifice each year will also remain exempt from employee and employer NI.
Your savings also grow without being taxed along the way. Finally, when you retire, you can usually take out 25% of your total savings as a tax-free cash lump sum, making it a very strategic way to build your nest egg.
Find out more:7 things to consider before salary sacrifice changes
Despite 2029's National Insurance changes, pension saving remains vital. Here are seven things to consider before the rules shift:
Take advantage before it changes Maximise bonus sacrifice now Check your life event windows Watch the minimum wage floor Plan around mortgage applications Anticipate employer changes Avoid making big life decisions too earlysource https://www.which.co.uk/news/article/salary-sacrifice-pension-change-may-affect-more-workers-7-things-to-consider-now-a6GtY0d2NXbY