Salary sacrifice cap will hit ordinary earners hardest, research finds
Reeves’ crunch Budget measures ranged from freezing income tax thresholds to fresh levies on milkshakes and lattes as she sought to lower the UK’s fiscal headroom.
But it was her decision to rip up the salary sacrifice scheme that sparked the largest reaction from employers and employees alike.
Under the most popular form of salary sacrifice, pension contributions, employees implicitly take a pay cut in exchange for increased pension contributions, potentially pushing them back under income tax thresholds.
The system is most effective for earners and families hovering over the £100,000 threshold, allowing them to get back 30 hours of free childcare.
But a £2,000 tax-free cap per year is set to be introduced from April 2029, meaning any further contributions will be subject to the standard national insurance rates of eight per cent on salaries under £50,270 and two per cent on any income above that.
Reeves argued for the changes, stating that the system does not ultimately benefit those on minimum wage and other ordinary workers.
In her speech on Wednesday, Reeves said: “Salary sacrifice for pensions, which was intended to be a small part of our pension system, is forecast to treble in costs from £2.8bn in 2017 to £8bn by 2030.
She noted that the schemes mainly benefit high earners, in particular “those in the financial services sector putting their bonuses into pensions tax-free”, while minimum-wage earners “don’t benefit at all”.
But, according to personal finance platform Finder, it’s basic rate taxpayers and higher rate tax payers who will suffer the most from the cap.
Earners lose out
According to analysis by Finder, an average earner who is putting away the recommended 15 per cent on a salary sacrifice scheme, 12 per cent personal allowance and 3 per cent employer contributions, could lose £215 from their yearly take-home pay due to the new cap.
It would see those on £52,720 impacted the most, losing a staggering £341.80 per year, while those on £39,039, which is the UK average, would lose £215.
In contrast, someone on a salary of £75,000 per annum saving 15 per cent would only see their take home pay reduce by £140, due to high earners only being hit with a two per cent national insurance charge.
Due to industry figures recommending earners save at least 15 per cent into a pension to secure adequate retirement savings, concerns are growing that the cap “could skew” saving habits, with approximately 7.7m UK workers using the scheme.
George Sweeney, personal finance expert at Finder said: “For a Budget where the broadest shoulders are supposed to bear the biggest burden, it’s surprising that regular working people… will take the worst hit on their take-home pay with the new salary sacrifice cap.”
“This new £2,000 salary sacrifice threshold could skew the long-term pension savings habits among ordinary people, as some may opt to reduce their contributions to avoid paying this extra NI or at least minimise its impact.”
Coming back under the threshold
While the cap will pose a severe blow for many workers, there are ways to come back under the £100,000 threshold without being slapped with heightened taxes.
ISAs grant a £20,000 tax free ceiling per year, allowing savers to dodge both income and capital gains tax. But, the Chancellor has also slashed the cash ISA ceiling from £20,000 to £12,000 as of April 2027, so a stocks and shares ISA may be the best option.
Shaz Bishop, wealth manager at RBC Brewin Dolphin, said: “Plan your pension contributions around your tax band, consider your partner or spouse’s tax position to balance out income and assets…and ensure you utilise and maximise all your employee benefits.”