Jessica O'ConnorDetails from the leaked Office for Budget Responsibility (OBR) forecast has set out plans to end National Insurance (NI) exemptions on the majority of salary-sacrificed pension contributions from April 2029.
According to the document: “Salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from NICs from April 2029.”
Contributions above that level would be treated as standard employee pension payments and become subject to both employer and employee NICs, while ordinary employer contributions remain exempt.
The change is forecast to raise £4.7bn in 2029-30 and £2.6bn in 2030-31.
The OBR says its costing assumes most contributions above £2,000 currently made via salary-sacrifice either migrate into standard schemes or continue under the revised rules.
It notes uncertainty around behavioural responses, with some employers potentially trying to offset the change by adjusting wage growth and increasing employer pension contributions.
However, it cautions that such approaches would be limited by OpRA rules and wider employment considerations.
The forecast also includes a smaller timing effect, estimating that related behavioural changes could “bring forward £0.3 billion of income tax liabilities to 2025-26,” which would unwind over the following two years.
Charlotte Ransom, CEO at modern wealth manager Netwealth, comments: “Salary sacrifice is one of the most effective tools workers have to build a meaningful pension, and many employers rely on it to reward and retain staff.
“It has now been confirmed that workers making pension contributions via salary sacrifice will no longer earn National Insurance relief from April 2029 above an annual £2,000 threshold.
“Capping the amount that people can put tax-free into their pensions from their salary will inevitably result in companies scaling back support, leaving workers poorer in retirement.
“If the Chancellor wants people to pay more tax, this is the wrong place to look. Workers should be encouraged to use every legitimate tool available to manage their tax bills, from maximising pension contributions within existing limits to making full use of ISA allowances. Punishing prudence won’t fix the system, it weakens it.”
Matt Russell, CEO at Epassi UK and Zest comments: “Capping pension salary sacrifice will ring alarm bells across the country. It will not only hit the long-term financial health of employees but also impacts businesses who use salary sacrifice as a cost-effective tool to reward staff and boost talent attraction, retention, and productivity.
“These employers will need to find other approaches to support employees or risk losing a competitive edge which will ultimately impact UK growth.”
