BUDGET 2025: Salary sacrifice into pensions capped at £2,000

Salary-sacrificed pension contributions above £2,000 will be subject to National Insurance (NI) contributions from April 2029, according to the Office for Budget Responsibility (OBR) documents.

What is ‘salary sacrifice’? Good question. Let’s think of it as a ‘swap’.

Imagine your total salary is a pile of money before the government takes its share in taxes. With salary sacrifice, you basically agree with your employer to swap £100 of cash it would pay you for something you need instead, like a bigger pension payment.

The £100 is swapped before your salary is taxed, which means you pay less income tax and national insurance, and you get to keep the full £100 value elsewhere (in your pension, for example).

There’s a benefit for your boss, too, as because your actual salary is lower, they pay lower employer National Insurance Contributions. So, it’s a win-win for everyone… except the government, which gets less tax as a result.

Capping the amount you can pay into your pension through these schemes per year without paying NI will claw back a bit of extra tax for the chancellor.

Our view

This is counterintuitive at a time when the government is apparently very concerned that millions of people are not saving effectively for retirement, as it is specifically targeting people who are attempting to boost their pension savings.

The government has launched a Pensions Commission whose entire purpose is to figure out how to grow retirement pots, and the Pensions Schemes Bill includes a raft of measures to help with this, so capping salary sacrifice into pensions seems completely at odds with those ambitions.

It’s also one of many ‘stealth’ taxes the government is attempting to get away with in this Budget in the hope that savers don’t really understand it. But the impact on people who use salary sacrifice will be immediate and will absolutely be noticed.

Many employees will see their take home pay fall, their pensions will not grow as quickly, and, for employers, the administritive costs will rise.

However, it’s important to know that if you currently sacrifice less than £2,000 of your salary into your pension, this won’t affect you.

For example, if you earned £40,000 a year, you’d need to sacrifice around 5% of your salary through a scheme to breach the £2,000 threshold.

Workers putting away any more than this will need to pay standard National Insurance rates: 8%, if they earn less than £50,000, and 2% on anything above that.