Imagine opening your payslip in 2029 and discovering that the clever trick you’ve been using for years to super-charge your pension suddenly costs you money instead of saving it.
That’s exactly what’s coming for millions of us.
Last month’s Budget dropped the bombshell, but the detailed impact assessment quietly released this week makes the picture even clearer – and frankly, worse than most people expected. A full 3.3 million workers who use salary sacrifice for their pension are going to feel the pinch when the new £2,000 cap on National Insurance relief kicks in from April 2029.
The One Change That Could Wipe Thousands Off Your Retirement Pot
Let’s be honest – salary sacrifice has been one of the last genuinely “too good to be true” perks left in the UK tax system. You give up part of your salary, it goes straight into your pension before tax and NI are calculated, and both you and your employer save on National Insurance. Many companies even pass their NI saving straight back to you as an extra pension contribution. Free money, basically.
Until now.
From 6 April 2029, only the first £2,000 of salary you sacrifice each year will escape employee and employer NI. Anything above that gets hit with the full whack – currently 8% for most workers (dropping to 6% next April) and 15% for employers from the same date.
Who Actually Gets Hit – And How Hard
The government’s own numbers are eye-watering.
- 7.7 million people currently use salary sacrifice for pensions
- 3.3 million of them sacrifice more than £2,000 a year
- That means 44% lose part of the tax advantage (up from the 26% originally estimated in the Budget)
Put another way, almost one in every two people who thought they were being smart with their retirement saving is about to take a hit.
And it’s not just higher earners. In fact, the structure of NI means middle earners could feel it more sharply.
“Someone earning under £50,270 still pays 8% employee NI on the excess sacrificed amount, whereas higher earners only pay 2%. That feels deeply unfair when both groups are trying to do the responsible thing and save properly for retirement.”
– Nicholas Nesbitt, private client tax partner
He’s got a point. A basic-rate taxpayer sacrificing £5,000 suddenly faces an extra £240 bill ((£3,000 excess × 8%)), while someone earning £80,000 only pays £60 extra. Same behaviour, wildly different penalty.
Why the Treasury Is Doing This (Spoiler: They Need the Cash)
The cost of NI relief on salary sacrifice has ballooned from £2.8 billion in 2016/17 to £5.8 billion last year, heading for £8 billion by 2030. That’s real money, even by government standards.
The cap is forecast to raise £4.8 billion in 2029/30 – conveniently just in time to help plug the famous “£22 billion black hole” we keep hearing about.
Cynical? Perhaps. But politically, it’s clever. The pain is delayed until after the next election and hits a group that doesn’t tend to riot in the streets – responsible middle-class savers.
The Hidden Danger: Employers Might Just Pull the Plug
Here’s what worries me most.
Many generous employers currently add their NI saving (up to 13.8% or soon 15%) as extra pension contributions. When that saving disappears on amounts over £2,000, some companies will simply stop doing it.
“There is a real risk that employers decide to level-down their pension offering rather than absorb the extra cost. That would be a serious backward step at exactly the moment we’re trying to fix Britain’s chronic under-saving problem.”
– Sir Steve Webb, former Pensions Minister
If even a fraction of employers react this way, the true number of “losers” could balloon well beyond 3.3 million.
What Still Works After 2029 (Because It’s Not All Doom)
Let’s not bury the good news – plenty of advantages remain:
- Full income tax relief at your marginal rate (20%, 40% or 45%)
- Contributions still reduce your “adjusted net income” – crucial for keeping child benefit, avoiding 60% tax trap, etc.
- Employer contributions remain completely NI-free (as long as they’re not part of a salary sacrifice arrangement)
- The first £2,000 of sacrifice still gives the full NI saving
In other words, salary sacrifice is going from “brilliantly tax-efficient” to “still pretty tax-efficient”. Just not the no-brainer it once was.
Smart Moves You Can Make Right Now
You’ve got three full tax years (2026/27, 2027/28, 2028/29) before the cap bites. That’s a golden window.
- Front-load if you can – Consider sacrificing larger amounts now while the unlimited NI relief lasts.
- Talk to your employer – Some may let you bring forward planned contributions or bonus sacrifices.
- Check your scheme rules – A few employers run “pure” employer contribution schemes that stay completely NI-free. Worth asking.
- Consider personal contributions instead – You lose employer NI saving, but gain flexibility and still get full tax relief.
- Don’t stop saving – Even with the reduced incentive, pension contributions remain one of the best tax shelters available.
I’ve seen clients panic and pause contributions when tax rules change. Almost always a mistake. Time in the market beats timing the tax system.
The Bigger Picture – Are We Taxing Responsibility?
Perhaps the most frustrating aspect is the signal this sends.
We constantly hear politicians wringing their hands about Britain’s retirement saving crisis – auto-enrolment minimums too low, gig economy workers uncovered, state pension age rising relentlessly. Then, the moment a large group starts doing exactly what we want them to do (saving seriously for retirement), we slap a new tax on it.
It feels like mixed messaging at best, counter-productive at worst.
Only time will tell whether the revenue raised justifies the damage to long-term saving behaviour. My bet? It won’t.
But for now, the message is clear: if you’re one of the 3.3 million affected, you’ve got until April 2029 to make the most of the current rules. After that, the game changes – and not for the better.
Plan accordingly.
