The Society of Pension Professionals (SPP) has warned that restricting salary sacrifice for pension contributions is likely to increase costs for employers and employees and reduce levels of pension saving.
Following the Budget 2025 announcement that national insurance contribution relief on salary sacrifice will be capped at £2,000 a person from April 2029, the SPP has circulated a parliamentary briefing note outlining the likely impact of the change on pension saving, employer costs and government revenues.
According to the briefing, around 3.3 million people currently using salary sacrifice for pensions are expected to be affected by the cap, including around 858,000 basic-rate taxpayers.
The SPP warned that the restriction comes at a time when government data already shows 15 million people are not saving enough for an adequate retirement, rising to 25 million if future state pension increases were limited to inflation rather than the triple lock
The SPP also highlighted the potential knock-on effects for employers, noting that increased NIC costs could feed through into lower pay growth, reduced employer pension contributions or changes to recruitment and workforce planning.
From April 2029, employers will be required to pay 15% national insurance contributions on amounts sacrificed above the £2,000 limit, with the government estimating one-off administrative costs of £20m and an ongoing annual compliance burden of £30m across affected employers
Previous analysis from WTW illustrates how the cap would translate into higher costs in practice.
David Robbins, director at WTW, said: “Someone exchanging 5% of a £50,000 salary for an employer pension contribution will pay £40 a year more employee national insurance under this change, while their employer will pay an extra £75. With a £100,000 salary and a 10% sacrifice, the extra NI is £160 from the employee and £1,200 from the employer.”
The SPP also questioned how much revenue the measure would ultimately raise. The Office for Budget Responsibility has acknowledged that behavioural responses are likely, including employees switching away from salary sacrifice, creating uncertainty around long-term tax receipts and a temporary boost to revenues in the first year the cap applies
Steve Hitchiner, chair of the SPP’s tax group, said: “The decision to restrict salary sacrifice for pensions will result in higher costs to employees and employers, along with less saving in pensions when more saving is needed. The additional revenue raised by the Exchequer will both diminish and is uncertain.
“Nevertheless, employers and employees should continue to use salary sacrifice where possible and pension saving remains the most effective means of saving for later life.”
