Chancellor Rachel Reeves has unveiled a significant shake-up to pension rules in the Autumn Budget, delivering a financial blow to millions of workers across the UK.
What is Changing with Salary Sacrifice?
The Labour government will introduce a new limit on how much employees can pay into their pensions tax-free through salary sacrifice arrangements. Under the new rules, workers will be required to pay the full rate of National Insurance on any pension contributions they make exceeding £2,000 per year.
This change directly impacts the take-home pay of anyone utilising these popular schemes. For example, a worker with an annual salary of £50,270 who pays 6% of their earnings into their pension would be approximately £80 worse off each year.
The financial penalty increases substantially for those saving more aggressively. If the same worker opts to save 10% of their salary, they would face an additional £240 in National Insurance payments annually.
Industry Experts Warn of Long-Term Damage
Pension specialists and industry bodies have reacted with alarm to the announcement, warning it could severely undermine retirement planning.
Yvonne Braun, Director of Policy, Long-Term Savings at the Association of British Insurers (ABI), stated the industry has long cautioned that Britain is 'sleep-walking' into a retirement crisis. "These types of short-term revenue raisers put the long-term security of people’s futures at risk," she said.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, echoed these concerns. "Restricting salary sacrifice on pension contributions could cause long-term damage to people’s retirement prospects," she warned. Morrissey fears employees may become less likely to increase contributions beyond the auto-enrolment minimums, and employers might scale back their own contributions or restrict pay rises due to the added administrative burden.
Broader Consequences for Savers and Employers
The repercussions extend beyond individual employees. Steve Hitchiner, chair of the SPP, highlighted that the change would "lead to a reduction in take-home pay for millions of employees... with the greatest impact for those earning less than £50,284 a year."
He also pointed out that this move contradicts the Chancellor's public commitment against imposing new costs on businesses, as it represents a sizeable additional cost to employers who administer these schemes.
This policy shift arrives at a fragile time for retirement savings in the UK. Data from Hargreaves Lansdown’s savings and resilience barometer reveals a troubling statistic: only 43% of households are currently on track to achieve an adequate retirement income. Experts argue that now is the time for measures that encourage saving, not discourage it.
