Pension Tax Change Warning: Modest Earners Face Losses from 2029
Concerns are mounting that planned restrictions on salary sacrifice pension schemes could disproportionately affect workers on modest incomes, according to fresh analysis. The changes, set to take effect from April 2029, will alter how millions of Britons save for retirement.
The Upcoming Shift in Pension Rules
From 2029, salary-sacrificed pension contributions exceeding an annual threshold of £2,000 will lose their exemption from National Insurance Contributions (NICs). Currently, these schemes allow employees to maintain their take-home pay while reducing their NICs, offering a tax-efficient method to bolster retirement pots. Employers often provide salary sacrifice as part of pension arrangements to support workers in building their savings.
The forthcoming adjustment, announced in the recent budget, means that contributions above the £2,000 limit will be treated as ordinary employee pension contributions within the tax system. Consequently, both employer and employee National Insurance Contributions will apply to these amounts, potentially increasing the cost of saving for retirement.
Millions of Savers in the Crosshairs
Figures released by HM Revenue and Customs (HMRC) in December indicated that approximately 3.3 million pension savers are directly on course to be impacted by this policy shift. HMRC estimates that around 7.7 million employees utilise salary sacrifice to make pension contributions, with 3.3 million of those sacrificing more than £2,000 of their salary or bonuses annually.
However, the potential fallout may extend far beyond this group. Sir Steve Webb, a former Liberal Democrat pensions minister and current partner at consultancy firm LCP (Lane Clark & Peacock), has highlighted a new document from the Office for Budget Responsibility (OBR). This analysis suggests that many workers contributing less than £2,000 could also face financial disadvantages.
Uncertain Behavioural Responses and Wider Implications
The OBR document notes that the behavioural response to this measure remains highly uncertain, given the various channels through which employers and employees might adapt. Sir Steve emphasised that far from ordinary workers being protected, millions on modest incomes could lose out, further eroding their incentive to save into a pension.
He stated: "We urgently need the Government to be clear about the true scale of the losses from this policy." Concerns have been raised that some lower-contributing workers might suffer due to reduced future pay rises or lower contractual salaries as employers adjust their compensation strategies.
The OBR document outlines potential employer responses, including formalising salary sacrifice arrangements to replicate tax benefits. This could involve increasing pension contributions in lieu of wage growth or lowering contractual salary in exchange for higher employer contributions. The concept of pass through is highlighted, with an assumption that a portion of the cost to employers might be transferred to employees through adjustments in pension contributions, salaries, or bonuses.
Furthermore, some employers might consider terminating salary sacrifice schemes altogether, which would affect the entire workforce, not just those contributing above the threshold. Sir Steve remarked: "The budget change to salary sacrifice rules around pensions was a huge measure which will cause employers to rethink their pay and pensions policies. The independent OBR shows very clearly that there are a range of ways in which employers will respond which will affect the wider workforce."
This development underscores the complex interplay between tax policy, employer behaviour, and retirement planning, with significant implications for financial security in later life.
