The government has succeeded in overturning a House of Lords decision on the salary sacrifice cap and the policy will now be enacted as set out in November’s Budget.
Pensions minister Torsten Bell used the House of Commons’ ”financial privilege” power to override all the House of Lords’ changes to the salary sacrifice cap legislation. This power gives the Commons the right to overrule any proposal that has cost implications.
It means that, from April 2029, salary sacrifice relief for pension contributions will be capped at £2,000 a year, in line with the plan set out by chancellor Rachel Reeves last year.
“There is no sign that the government have seriously engaged with the concerns we expressed. Significant features remain undefined.”
Baroness Neville-Rolfe
Peers in the House of Lords had previously challenged the government over the policy, voting to raise the cap to £5,000 and introducing exemptions for charities and small businesses. However, the House of Commons – in which the government has a strong majority – has rejected the changes.
Addressing the House of Commons last week, pensions minister Torsten Bell reiterated his argument that other tax incentives were more important as they were more inclusive, and pointed out that the annual cost of salary sacrifice for pension contributions was equivalent to the annual cost of the Royal Air Force.
“On this basis, the status quo is indefensible,” the minister stated. “Change was inevitable, but we have chosen to take a pragmatic approach, with no change until 2029, and a £2,000 cap to allow pension contributions via salary sacrifice to continue.”
Confirmation of the cap comes despite months of opposition from the pensions industry, with several trade bodies warning of negative impacts on savers beyond those directly affected by the cap.
Peers fail on impact assessment bid
Baroness Lucy Neville-Rolfe, a Conservative peer, inserted several additional “motions” to the National Insurance Contributions (Employer Pensions Contributions) Bill, requiring the government to publish an impact assessment report before enacting the cap.
She expressed disappointment at the way in which the House of Lords’ amendments were rejected, adding: “There is no sign that the government have seriously engaged with the concerns we expressed. Significant features remain undefined.”
Liberal Democrat peer Baroness Susan Kramer cited the Office for Budget Responsibility’s assessment of the cap’s impact, which she said “presents us with a high degree of uncertainty”.
“Sometimes you come across a bill and you just know that the government has misunderstood what its impacts are going to be,” Baroness Kramer added, “and that when it is in force there will either have to be very dramatic changes or the whole bill will need to be reversed.”
However, these motions were rejected by the House of Lords when put to a vote, which means the bill will now proceed to Royal Assent.
