SAVINGS HIT: Pension savings could face a hit as salary sacrifice reforms take effect in 2029 (Image: Getty)
Around 3.3 million pension savers are set to be affected by salary sacrifice reforms announced in the Budget, according to figures from HM Revenue and Customs (HMRC). Updated guidance shows that around 7.7 million workers currently use salary sacrifice to boost their pension contributions.
Of those participating, about 3.3 million sacrifice more than £2,000 of earnings or bonuses each year. Under the new rules, the portion of salary-sacrificed pension contributions above this £2,000 threshold will lose their National Insurance (NI) exemption from April 2029.
Any amounts exceeding the limit will be treated as standard employee pension contributions for tax purposes. These sums will therefore become liable for NI contributions, changing how many workers and employers calculate the cost of saving into pensions.
READ MOREWhat the changes mean for workers
Salary sacrifice schemes allow employers to divert part of an employee’s pay directly into their pension before tax and NI are applied. Participants benefit by reducing NI payments, effectively preserving more of their take-home income while boosting retirement savings.
Industry bodies have criticised the proposed reforms, arguing they threaten the affordability of future pensions at a time when many workers already risk retiring with insufficient savings. Yvonne Braun, director of policy, long-term savings, health and protection at the Association of British Insurers (ABI), previously warned that “the wider work required to rebuild people’s trust in the stability of pensions will take years”.
Who is most affected?
HMRC guidance indicates that salary sacrifice users are typically of working age, with certain groups more heavily represented. The document states: “In particular, those who are aged 31 to 50 (52%) are estimated to be overrepresented compared to their prevalence in the employee population in general (44%).”
It also adds: “Males are also estimated to be overrepresented in the population, making salary sacrifice pension contributions (59%) compared to their prevalence in the UK adult population (50%).” These patterns highlight which workers may see the biggest impact once the changes come into force, reports Vicky Shaw for PA.
Impact on employers
HMRC estimates that the reforms will affect around 290,000 employers currently offering salary sacrifice pension schemes. The guidance says: “This measure is expected to have an impact on 290,000 employers who operate salary sacrifice arrangements for pension contributions,that who will now need to account for relevant pension contribution amounts and report and pay class one national insurance contributions on these, where appropriate.”
Businesses will face both upfront and long-term operational costs as they adapt to the new system. HMRC noted: “One-off costs will include familiarisation with the change, the training of staff and updating of software. Continuing costs will include performing more calculations and recording and providing additional information to HMRC where salary sacrifice schemes continue to be used.”
Administrative burden
Beyond employer costs, HMRC will also need to modify its own systems to implement the changes. The document confirms: “HMRC will need to make IT changes to support implementation of this measure. These changes are expected to cost in the region of £1.9m.”
The guidance also reveals how rapidly the system has grown in financial terms. It states: “Salary sacrifice for pensions contributions remains, and its cost as a relief has increased markedly from £2.8bn in forgone national insurance contributions in tax year 2016 to 2017, rising to £5.8bn in tax year 2023 to 2024.”
Long-term projections
HMRC has warned that the cost of the relief would escalate further without reform. The document adds: “Were no changes made, it is expected that this would nearly triple to £8bn by tax year 2030 to 2031.”
This projected growth is cited as a major reason behind the decision to introduce the £2,000 annual cap on NI exemptions tied to salary sacrifice. The government argues the measure is designed to limit the rising cost of pension tax relief.
Industry reaction
Former pensions minister Sir Steve Webb, now a partner at consultancy Lane Clark & Peacock, cautioned that employer responses could have far-reaching consequences for workers. He said: “A Budget measure that was largely seen as complex and technical could have significant real-world implications for millions of workers.”
He added: “At a time when the nation as a whole has a significant ‘under-saving’ problem, this change will make matters worse.” Sir Steve also highlighted the scale of the impact: “On the Government’s own estimates, around three in seven of the workers who use salary sacrifice to pay into their pensions will be hit by the change, whilst employers will face a bigger hit because of their higher rate of national insurance contributions.”
Warning for the future
Although the reforms will not take effect until 2029, experts warn that preparations will begin much sooner. Sir Steve concluded: “Although employers have time between now and 2029 to consider their options, there is a risk that some will simply cut back on the generosity of their workplace pension offering, which would be a serious backward step.”
Pensions campaigners argue that any reduction in employer contributions could undermine long-term savings outcomes. They say the coming years will be critical in determining whether reforms support stability or further weaken confidence in workplace pensions.
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