Could salary sacrifice changes reduce your pension?

Could salary sacrifice changes reduce your pension? What do we need to know now?

Small changes announced in the budget can have a big impact on future retirement savings.

If you currently pay into your pension through a salary sacrifice arrangement or run a business that offers one, the proposed reforms mean the tax benefits may not be as great in years to come.

From April 2029, only the first £2,000 of pension contributions made through salary sacrifice each year is expected to qualify as National Insurance contributions. The above amount will attract NICs in the normal way, but pension contributions will remain exempt from income tax (subject to the usual limits).

Salary sacrifice has long been popular as it allows employees to give up part of their gross salary in exchange for pension contributions, reducing income tax and NICs in the process. Employers also benefit as they save on company NICs and often reinvest some of these savings into staff pensions. Limiting NIC exclusions would change that dynamic. While pension contributions themselves remain tax efficient, the overall savings become smaller once NICs start to apply.

For people who contribute more than just salary sacrifice, the difference can grow over time. Industry figures show that millions of workers currently rely on the scheme, with the vast majority paying more than the new £2,000 limit. Pensions experts have warned that, when faced with higher NIC costs, some employers may rethink how much they contribute or redesign their schemes and this could ultimately slow the growth of pensions across the workforce.

Even though 2029 may seem like a long way off, changes like this need to be made early on. Employees may want to understand how much they are currently sacrificing for their retirement funds and what impact future regulations will have on their take-home pay and retirement funds. It also allows them to consider the benefits of current regulations, before any new changes, by increasing their current contributions.

In the meantime, business owners and finance teams need to think about payroll systems, benefit structures and whether current arrangements will still deliver the desired results once NIC restrictions are introduced.

It’s also worth remembering that salary sacrifice is just one part of the bigger retirement planning picture. Contribution levels, employer funding, investment choices, and broader tax strategies all play a role in determining the comfort of life after work. When one piece of the puzzle changes, it often makes sense to step back and review the whole picture rather than changing things individually.

The next step

The ETC Tax advisory team works with taxpayers to model the impact of upcoming regulatory changes, review retirement funding strategies and ensure plans remain tax compliant and efficient. If you need support in planning your future, don’t hesitate to contact us. Our experienced team of tax advisors will be happy to help. Visit our website Retirement Tax Planning & Advice | ETC Tax for further information or email us at enquiries@etctax.co.uk if you require support.

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