Chancellor Rachel Reeves has confirmed a new £2,000 rule that will cap the amount workers earning over £50,271 can pay into their pensions via salary sacrifice schemes before contributions become liable for National Insurance. The measure, part of a £5bn raid on pensions, is expected to leave nearly three million workers poorer in retirement.
Impact on Higher Earners
According to HMRC estimates, around 2.2 million higher rate taxpayers—those earning between £50,271 and £125,140—are expected to reduce their pension savings as a result of the policy. In total, 2.9 million workers are projected to cut back on pension contributions once the new restrictions come into force in 2029.
The Treasury has defended the move, arguing that high earners were currently able to “pile” cash into their pensions without paying a “penny in tax.” A Treasury spokesperson stated: “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 95pc of workers earning under £30,000 using salary sacrifice will be protected, and as IFS analysis shows, over three quarters of under 30s will be unaffected.”
Criticism from Former Pensions Minister
Sir Steve Webb, former Liberal Democrat and Conservative Party pensions minister, criticised the policy, saying: “The Government has presented the changes to salary sacrifice for pensions as being a relatively painless way of cracking down on a tax break mostly enjoyed by the well-off. But these figures show that the effects of the policy will be far more damaging than had previously been admitted.”
Sir Steve added: “At a time when the Government is running a major commission to tackle the issue of pension under-saving, it is shocking that a separate government policy will result in over 2.9 million workers cutting back on pension saving. Nearly 25pc of these are basic rate taxpayers. It is hardly ‘joined-up government’ to be stressing the need for more pension saving one day and then implementing a policy that will reduce the pension savings of millions the next.”
Details of the Shake-up
Under the new rules, there will be a £2,000 cap on the amount workers can pay into their pension via salary sacrifice schemes before contributions are subject to National Insurance. The Treasury estimates this move will raise £4bn for the government.
The policy is set to take effect in 2029, affecting millions of workers who currently benefit from tax-efficient pension contributions through salary sacrifice arrangements.
