From April 2029, National Insurance savings on salary sacrifice pension contributions will be capped at £2,000 per year. The changes will be overseen by Andy Burnham and John Healey. The Prime Minister has so far refused to call a snap general election, meaning he is likely to remain in Number 10 until the summer of 2029.
Details of the Salary Sacrifice Cap
The Labour government's changes to salary sacrifice schemes will take effect from April 2029. Salary sacrifice is widely used by employers and employees to support pension saving, but the rules will change in a few years' time. From that date, the National Insurance savings will be capped at £2,000 of contributions through salary sacrifice a year.
Employees, as well as employers, will pay National Insurance contributions on the amount above £2,000 for employee contributions through salary sacrifice. Most employees making typical contributions will not be affected, according to HMRC, in an impact statement published this year.
Impact on Workers and Earnings Bands
AJ Bell warned that while it is still unclear how employers may react to the changes, the move will mean many working people will see less in their pay packets. The biggest impact is expected to cluster around the £45,000 to £50,000 earnings band, as the lower 2% NI rate kicks in for those earning above £50,270.
AJ Bell stated: "This risks weakening a valuable savings incentive at the same time policymakers are worried about inadequate retirement provision. This change has been rushed onto the legislation books despite being years off implementation, so there is still ample time for Healey to take a second look. If the government proceeds, it should publish a clear assessment of the likely behavioural impact on pension contributions."
What Remains Unchanged
Employees can still contribute as much as they want to their pensions, including via salary sacrifice, and these contributions will still be exempt from Income Tax, subject to the usual limits. Employees who choose to sacrifice salary to receive Tax Free Childcare or Child Benefit can keep doing so. However, any pension contributions above £2,000 will be subject to employer and employee National Insurance contributions.
