Professional Adviser: Preparing for 2029: Adapting to the Budget's salary sacrifice cap

Each year, rumours swirl that pension tax reform is on the horizon. Prior to the 2024 Autumn Budget, there were speculated changes to tax relief, including the removal or limitation of tax-free cash lump sums and the National Insurance exemption on employer pension contributions.

This year, the government responded to what it describes as a looming fiscal gap by enacting the much-rumoured cap on salary sacrifice pension contributions, turning speculation into reality.

While expected to generate revenue of £4.8bn in 2029/30, and £2.6bn in 2030/31, the changes come at a time when the amount saved into pensions is woefully inadequate for most workers. But salary sacrifice doesn't just impact employees - employers and pension providers now have work to do before the new rules go into effect.

What changes are coming?

The chancellor announced that National Insurance (NI) savings on salary sacrifice contributions will be capped at £2,000 per employee beginning April 2029. In effect, this means any contributions exceeding the threshold will be subject to standard NI rates of 15% from the employer, 8% on income up to the upper earnings limit of £50,270, and 2% on any income higher than that from employees.

By providing a four-year runway for implementation, the government has acknowledged the operational realities and the time required to adapt to the removal of what has always been seen as a legitimate method of paying contributions to workplace savings. This timeline offers providers and employers the necessary breathing space to adapt their systems, avoiding the disruption and confusion that often accompanies rapid structural shifts.

Preparing for 2029

The burden of this policy primarily lands on the shoulders of British businesses. For years, salary sacrifice has been mutually beneficial for employees and employers alike, as both save on NI. This allows those savings to be reinvested into the pension scheme or broader benefits such as childcare vouchers, cycle-to-work schemes, and health screenings. 

With the new cap, employers will face a larger NI bill in the future. More immediately, they must tackle the operational administrative task of reviewing and potentially unwinding current arrangements. Employers must also consider whether to revert to traditional contribution processes or maintain complex two-tier systems for those who reach the £2,000 relief threshold.

Many employers currently share their own NI savings with staff in the form of additional pension contributions. As the tax advantage for employers diminishes above the cap, this shared benefit may be reduced or withdrawn. Consequently, even employees who do not personally exceed the relief cap may see a reduction in their total pension inputs as employer contributions are adjusted.

The road ahead

While this policy alters the landscape, it arguably represents an adjustment rather than a fundamental reform. For the pensions industry's benefit, we need to extend beyond revenue generation to ensure long-term stability by establishing a structure that has the capacity to withstand the test of time.

The pension system needs to be fit for purpose, fit for the future, and fit for the economic environment. People plan their retirement over decades; they cannot build trust in a system that shifts under their feet every electoral cycle.

The 2029 salary sacrifice changes are coming, and the industry will adapt - we always do. But until we move away from treating pensions as a stopgap to help plug a hole in public finances and start operating with the best interest of end members in mind, we risk undermining the very culture of saving that the country needs.