In a significant move for retirement planning, the Labour government has confirmed it will protect over four million pension savers from an impending change to National Insurance rules. Chancellor Rachel Reeves has announced a new cap on the tax relief available for pension contributions made through salary sacrifice arrangements.
The New £2,000 NICs Exemption Cap
From April 2029, the landscape for pension savings will shift. The government is introducing a limit on the amount of salary or bonus that can be sacrificed into a pension without incurring National Insurance Contributions (NICs). Only the first £2,000 of employee contributions made via salary sacrifice each year will remain exempt from both employer and employee NICs.
Salary sacrifice is a popular arrangement where an employee agrees to a reduction in their gross salary or bonus. Their employer then pays the equivalent amount directly into their pension pot. This method has historically been attractive because the sacrificed amount is exempt from Income Tax and NICs, providing a valuable boost to retirement savings.
Who Will Be Impacted by the Change?
According to Treasury Minister Lord Livermore, an estimated 7.7 million employees across the UK currently use salary sacrifice for their pensions. Of this group, the government's analysis reveals a clear split:
- 4.3 million people (56%) who sacrifice £2,000 or less annually will be fully protected and see no change to their NICs liability.
- 3.3 million people (44%) who sacrifice more than £2,000 will be affected by the new cap.
For those impacted, the average additional employee NICs bill is projected to be around £84 for the 2029/30 tax year. It is important to note that all pension contributions, including those made via salary sacrifice, will continue to be exempt from Income Tax, subject to the Annual and Lifetime Allowances.
Government Reasoning and Sector Application
Lord Livermore explained the government's position, stating the change ensures pension tax relief is "targeted at those who need it most." He confirmed that the Office for Budget Responsibility (OBR) estimates 76% of the additional employer NICs cost from this measure will be passed on to employees, an assumption consistent with previous changes to employer NICs.
This rule will apply universally to all employers offering salary sacrifice for pensions, whether in the private or public sector. However, many public sector bodies are already prohibited from using such arrangements under "Managing Public Money" rules. The government emphasised its ongoing support for pension saving through a system of tax reliefs valued at over £70 billion a year.
The announcement provides savers and employers with a clear, four-year runway to adjust their financial planning ahead of the rule's implementation in 2029.
