Salary sacrifice pension change may affect more workers – 7 things to consider now

Millions of workers who use salary sacrifice to boost their pensions could feel the impact of new National Insurance changes coming in from April 2029.

Under the plans, only the first £2,000 a year you put into your pension through salary sacrifice will be exempt from National Insurance. Fresh analysis from the Office for Budget Responsibility (OBR) suggests the effects may not be limited to those directly caught by the cap. 

Here, Which? explains what's changing and highlights seven things you should consider ahead of the changes in April 2029.

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What’s changing for salary sacrifice in April 2029?

From April 2029, if an employee makes pension contributions via salary sacrifice, they'll pay the full rate of NI on any amount above £2,000: 8% on a salary of less than £50,270 and 2% on income above this.

All pension contributions, including those made via salary sacrifice, will remain exempt from income tax, subject to the annual allowance of £60,000.

HMRC figures show that around 30% of private sector employees and 10% of public sector employees use a salary sacrifice arrangement for their pension contributions.

It estimates that 7.7 million employees currently use salary sacrifice for pensions. Around 3.3 million contribute more than £2,000 a year and will be directly affected by the cap.

• Find out more: Chancellor confirms salary sacrifice cap for pension contributions 

Why does the OBR think more workers could be affected?

The OBR says the ‘behavioural response’ to the measure is ‘highly uncertain’ and sets out several ways employers and employees could react.

Employers could restructure pay and pensions

The OBR expects some businesses to look for ways to limit the new NI cost by changing how they structure pay and pensions. Instead of using salary sacrifice, employers could lower future pay growth and increase standard employer pension contributions instead. 

Traditional employer pension contributions remain exempt from NI, so this approach could reduce the impact of the cap. 

However, the OBR notes that such changes may need to apply across the workforce. That means employees contributing less than £2,000 could still see slower pay growth as employers adjust.

• Find out more: what is salary sacrifice for pensions?

More workers could move to relief at source schemes 

The OBR also expects the cap to push some employees towards relief at source pension schemes. Under these schemes, higher and additional-rate taxpayers must claim back extra tax relief through self-assessment. 

The OBR estimates that around 10% of this additional relief could go unclaimed if people fail to complete the paperwork or are unaware they need to. That would increase tax receipts permanently, even though the policy itself does not change income tax relief on pensions.

• Find out more: calculate your pension tax relief 

Employers may pass on costs 

The OBR assumes that around three quarters of the additional employer cost will ultimately be passed on, largely through lower wages and, to a lesser extent, lower employer pension contributions. 

If that happens, employees contributing less than £2,000 could still feel an indirect impact through slower wage growth.

Some people may reduce their pension contributions 

The OBR assumes that 80% of affected defined contribution scheme members will reduce their pension contributions in response to the cap. It models lower earners cutting contributions by around 2.75% and higher earners by 1.8%.

While this could increase take-home pay in the short term, the OBR estimates it would raise around £100m a year in extra tax, as more income would be taken as salary and therefore subject to income tax and NI.

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How will it affect take-home pay? 

As it stands now, for most employees, the impact on monthly take-home pay is likely to be small. 

Under the new rules, only contributions above £2,000 a year will attract employee National Insurance. That means someone earning £40,000 and contributing 5% of their salary would not be affected, as 5% equals £2,000.

Research from Vanguard suggests that on a £50,000 salary, contributing 5% (£2,500 a year), the change would reduce take-home pay by around £40 a year, or about £3.30 a month. Someone earning £80,000 and sacrificing 10% would see their take-home pay fall by around £120 a year, or £10 a month.

However, the effect can be more noticeable for graduates who are repaying student loans.

Salary sacrifice reduces your official salary for payroll purposes. That means you currently pay less employee National Insurance and, if you have a student loan, lower repayments as well.

Based on current rates, most basic-rate earners pay 8% employee NI. Those repaying an undergraduate student loan typically repay 9% of earnings above their plan’s repayment threshold.  For someone paying both, that means up to 17p can currently be saved for every £1 sacrificed. 

Once the £2,000 cap is introduced, contributions above that limit will no longer reduce NI.  For a graduate contributing £5,000 a year through salary sacrifice, around £3,000 would fall above the cap. At current rates, that could mean roughly £240 more in employee NI and about £270 more in student loan repayments –  a total of around £510 a year.  

• Find out more: repaying your student loan

Is salary sacrifice still a good way to save?

Even with new changes coming, using salary sacrifice is still a very good way to save for the future. 

Pension contributions made through salary sacrifice will continue to benefit from income tax relief in the same way as now. The first £2,000 you sacrifice each year will also remain exempt from employee and employer National Insurance. 

Your savings also grow without being taxed along the way. Finally, when you retire, you can usually take out 25% of your total savings as a tax-free cash lump sum, making it a very strategic way to build your nest egg.

• Find out more: how to boost your pension

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7 things to consider before salary sacrifice changes

Despite 2029's National Insurance changes, pension saving remains vital. Here are seven things to consider before the rules shift:

1. Take advantage before it changes: If you can afford to, you may want to review whether increasing contributions before 2029 makes sense, particularly if you are currently sacrificing more than £2,000 a year and benefiting from full NI savings. 
   
2. Maximise bonus sacrifice now: If you receive a bonus, paying some or all of it into your pension through salary sacrifice before April 2029 could be more NI-efficient than doing so after the cap is introduced. 
3. Check your life event windows: You usually cannot change your salary sacrifice arrangement at any time. Many employers only allow changes once a year. Make sure you understand your employer’s rules so you are not locked into an arrangement that no longer suits you. 
4. Watch the minimum wage floor: Salary sacrifice cannot reduce your cash earnings below the National Minimum Wage. If you increase the amount you sacrifice, check that your post-sacrifice pay still complies. 
5. Plan around mortgage applications: Because salary sacrifice lowers your contractual salary, it can affect how lenders assess your income. If you are planning to apply for a mortgage or remortgage before 2029, consider how your pension contributions may affect affordability assessments. 
6. Anticipate employer changes: Some employers may review their approach after 2029, potentially adjusting pay structures or pension contributions. It could be worth asking your employer how they expect to respond to the new rules. 
7. Avoid making big life decisions too early: The changes do not take effect until April 2029. Avoid making major decisions, such as changing jobs or retirement plans, based solely on a policy that is still several years away.