Workers repaying student loans will see 17% tax rise from 2029 due to salary sacrifice cut

Workers paying off a student loan will see their taxes rise by 17% from 2029 because of the government’s cap on salary sacrifice.

Right now, if you put money into your pension through ‘salary sacrifice’, you get to save on two things: income tax and National Insurance. Your employer also saves on their National Insurance contributions, and many companies pass that saving back to you into your pension.

Basically, more of your earnings end up in your pension instead of going to the taxman.

However, from 2029, the government plans to cap these salary sacrifice benefits at £2,000 per year. Anything you contribute above that amount will lose National Insurance savings.

Critics argue this change is unfair because it hits lower earners harder than the wealthy. Basic-rate taxpayers pay 8% in National Insurance, while higher earners only pay 2% National Insurance, so they lose less.

But it gets even worse for graduates repaying student loans.

Currently, salary sacrifice also saves you the 9% that would otherwise go toward loan repayments. But from 2029, that benefit disappears too.

So, a basic-rate taxpayer with a student loan could effectively face a 17% hit on any pension contributions above the cap, while a higher earner loses comparatively little.

Conservative MP Mark Garnier told Investing Insiders: “The worst part about the salary sacrifice cap is why it is being brought in.

“Rachel Reeves’s fiscal rule requires her to balance her books by 2029 and this measure is expected to cut allowances by £4.8 billion. But wealth managers are already coming up with workarounds for those who can afford their services – typically higher rate tax payers.

“So, not only does this measure target basic rate taxpayers and student debt repayors – it messes up for ever a brilliant scheme that only sees one year of marginal benefit to government coffers.”