Reactions to the £2,000 cap on national insurance relief in pensions salary sacrifice from 2029 have been overwhelmingly negative, but there is also relief that income tax relief remains untouched for now.

The cap on NICs relief for pension contributions paid by the employer – saving employees 8% for incomes paying basic rate tax and 2% above that – is being capped at £2,000 from 2029, announced before the Pension Commission reporting on adequacy.      

The change, which had been trailed, follows a significant increase in employer NICs at last year’s Budget by reducing the threshold and increasing the headline rate to 15%, which made pensions salary sacrifice more attractive.      

Reeves said the cost to the exchequer of pensions salary sacrifice is expected to reach £8bn in 2030 without change, from £2.8bn in 2017, claiming bankers put their bonuses into pensions to save tax.  The Treasury says the cap of £2,000 will shield 74% of basic rate taxpayers using salary sacrifice.       

Unlike income tax, NICs are currently not payable on pensions either on contributions or when drawn, meaning the government could in theory have opted to stop the exemption for state pensioner incomes. The Society of Pension Professionals has previously warned that adding NICs on pension contributions hits ‘working people’ - the demographic Labour had pledged to protect from income tax, NICs and VAT increases in its election manifesto.       

The attack on pension saving comes despite pensions industry lobbying.    

"We recognise the government is facing challenging economic circumstances, and difficult decisions must be made,” said the director general of the Association of British Insurers, Hannah Gurga, but added: “The nation’s savers, and our industry, need long-term policy stability to plan for the future with confidence.” 

 

She called the changes to salary sacrifice “disappointing”, saying it “risks pushing millions of people into poorer retirements, something government and industry have been working hard to avoid”.   

 

Yvonne Braun, director of policy for long-term savings, health and protection at the ABI, called the cap “a short-sighted tax grab which will lower pension saving and undermine people’s retirement security” and which will work against the government’s ambition to increase scale in pensions to drive investments into UK businesses and infrastructure. 

 

“While it's encouraging that employers and payroll providers will have until 2029 to make the necessary changes to their systems, the wider work required to rebuild people's trust in the stability of pensions will take years,” she added. 

 

Trust will suffer, agreed Steward Hastie, who chairs the Association of Consulting Actuaries: “This tinkering will only continue to feed the cycle of uncertainty and speculation ahead of each Budget announcement, eroding trust in long-term retirement savings in the UK that we vitally need.”  

Others pointed to the possible effect on employers. Zoe Alexander, executive director of policy and advocacy at Pensions UK, said: “Applying National Insurance to salary-sacrificed pension arrangements above £2,000 will harm the economy, businesses and pension saving.”  

   

However, some say it could have been worse. Patrick Heath-Lay, chief executive of DC master trust provider People’s Partnership, said: “Like many, we had hoped salary sacrifice would not be touched in the Budget: this will have a significant impact on some savers and on business. However, even with salary sacrifice capped at £2,000 from 2029, pensions remain strongly tax advantaged.” 

 

While restricting salary sacrifice will make the pensions tax regime less generous, he stressed that the tax raised will be a small portion of available tax breaks, adding: “We would urge pension savers not to mistake this change for a fundamental overhaul of the pension tax system: these changes should not dent confidence in pension saving.”  

 

Royal London’s director of policy Jamie Jenkins called the cap for NICs purposes "perhaps the least worst outcome for pensions", pointing to tax relief and the 25% tax-free cash at retirement.  

 

While there will be an impact on what is being paid into some people’s pensions, he said the bigger story could be the resulting rise in employer costs. 

For employers, the cap will not just increase costs but also complicate the administration of the benefit.  

The Pensions Management Institute has now called for guidance and transitional arrangements to avoid disruption for employers and savers, “urgent detail on implementation” as administrators need time to adapt payroll and pension systems, clarification on scheme types – citing non-contributory schemes versus salary sacrifice arrangements – and an impact assessment on higher earners, particularly those in the £100k–£125k band who use salary sacrifice to avoid the 60% tax effective rate in this bracket.

The focus on employer reactions will only intensify. "Employers will need to investigate the increased cost to their business and understand how this will be met, particularly if they currently share the employer NICs saving with employees,” said tax incentives and remuneration partner at law firm Travers Smith, Elissavet Grout.  

“Beyond this, salary sacrifice documentation will need to be reviewed and communications sent to employees explaining the change and how it will impact their take-home pay,” she advised.  

Grout predicted that employers will be looking at other ways of reducing their employment costs.  

“The use of share plans where returns can be taxed as capital rather than income and do not attract NICs charges could play an important role in this,” she said.