HMRC has confirmed that 3.3 million workers will be £84 worse off each year under new salary sacrifice rules set to be introduced by the Labour government led by Andy Burnham and Chancellor John Healey. The changes, which impose a £2,000 annual cap on pension contributions made through salary sacrifice, will take effect from April 2029.
How the salary sacrifice cap will work
Under the new rules, workers will be limited to sacrificing £2,000 a year of their salary or bonuses into workplace pensions before they become liable for tax. The cap is scheduled to come into force in April 2029, when Mr Burnham is expected to remain in power, having so far refused to call an early general election. The next election is likely to be held later in 2029.
A Freedom of Information request submitted by Bowmore Wealth Group found that an estimated 7.7 million employees currently use salary sacrifice to make pension contributions. Of these, 3.3 million sacrifice more than £2,000 of salary or bonuses, meaning they will be directly affected by the cap.
Impact on National Insurance payments
HMRC estimated that the average worker impacted by the changes would pay £84 more per year in National Insurance. Sir Steve Webb, former Liberal Democrat and Conservative coalition government pensions minister and partner at consultancy firm LCP, warned that workers could end up bearing far more of the total National Insurance cost than official figures suggest.
“These changes will land employers with a huge increase in their costs, and they will try to recover this money by squeezing pay increases,” Sir Steve said. “This means that in some cases workers could end up hundreds of pounds a year out of pocket, once you take account of more than the immediate impact through the changes to the pensions rules.”
Treasury defends reforms as fair
A Treasury spokesman defended the reforms, stating: “High earners piled in huge bonuses through salary sacrifice without paying a penny in tax – a taxpayer-funded perk largely benefitting the better off. Our fair reforms protect 95% of workers earning under £30,000 using salary sacrifice.”
The government maintains the changes are designed to close a tax loophole that disproportionately benefits higher earners, while the majority of lower-income workers will remain unaffected.
