The People’s Partnership is among the providers urging calm among savers in response to the government’s proposed changes to salary sacrifice rules.
The government is expected to legislate before Christmas to restrict the national insurance exemption on employee pension contributions made via salary sacrifice. The Financial Times reported late last week that ministers planned to bring the measures forward within weeks, despite the changes not taking effect until April 2029.
The reforms will cap the national insurance break on employee contributions made through salary sacrifice at £2,000 a year. Any amount above that threshold will attract employer and employee national insurance in the same way as other employee pension contributions. All employer pension contributions remain national insurance-exempt.
According to the government, most employees making typical contributions will be unaffected, and the change will make the system “fairer and more sustainable”.
However, many in the pensions industry have warned against the change, arguing that it would disincentivise pension saving.
‘Don’t panic, yet’
The shift is significant for the 7.7m workers currently using salary sacrifice and for employers that rely on the arrangement to manage reward costs.
Providers have cautioned against premature changes while details are still emerging.
“Providers will need to support employers and their advisers through this process and ensure their communications are clear, simple and easy to act upon.”
Stuart Reid, People’s Partnership
Stuart Reid, distribution director at People’s Partnership, said: “The changes to pensions salary sacrifice announced in the Budget might feel substantial, but employers shouldn’t panic… yet. They won’t take effect until 2029, and there’s no immediate action for employers to take until details become clearer.”
He added: “Providers will need to support employers and their advisers through this process and ensure their communications are clear, simple and easy to act upon – specifying calls to action and providing the tools and information to navigate any required adjustments at the appropriate time.”
Speaking just after the salary sacrifice rule change was confirmed last week, People’s Partnership chief executive Patrick Heath-Lay contended that pensions “remain strongly tax advantaged”.
He urged savers “not to mistake this change for a fundamental overhaul of the pension tax system”.
“People can be reassured that core pension rules remain unchanged for now, and consistent contributions still go the furthest in shaping a comfortable retirement.”
Chris Eastwood, Penfold
Chris Eastwood, chief executive officer at Penfold, also highlighted that rules were unchanged “for now”, with the salary sacrifice change not due to be implemented until 2029.
“People can be reassured that core pension rules remain unchanged for now, and consistent contributions still go the furthest in shaping a comfortable retirement,” he said.
“But long-term policy clarity is essential. Sudden changes make it harder for people to plan and harder for the public to trust the system.”
Pension policy conflicts
A central question for the industry following the Budget is how the salary sacrifice cap aligns with wider pension policy. Adequacy challenges remain substantial, and some argue that withdrawing incentives risks discouraging saving.
Richard Knight, partner at Burges Salmon, said: “Critics will no doubt point to what appears to be an inconsistency between the efforts of the Department for Work and Pensions to address concerns around individuals failing to save enough for retirement… and the Treasury’s approach, which appears to be to reduce tax incentives to save.”
Employer cost modelling suggests the impact may be material, particularly where sacrifice is widely used. David Robbins, director at WTW, noted: “Someone exchanging 5% of a £50,000 salary for an employer pension contribution will pay £40 a year more [in national insurance] under this change, while their employer will pay an extra £75.”
There are also likely to be behavioural effects. Analysis from Money.co.uk highlights that the average 25 to 34-year-old holds just £3,544 in savings, suggesting that reducing the national insurance-related incentive could have a greater impact on younger workers who already struggle to build financial resilience.
Further government guidance is expected ahead of April 2029, including how employers should report sacrificed amounts through payroll.
