It was once a clever way to make your wages look less while squirrelling the extra money away into your pension pot. Salary sacrifice has long been used by workers, but new rules announced in the Budget have made this a less lucrative option, especially for those in the so-called squeezed middle.
Salary sacrifice is an agreement where you give up a portion of your pre-tax salary in exchange for a non-cash beenfit such as a company pension scheme. Currently, staff who use the salary sacrifice scheme do not have to pay any National Insurance or income tax on that portion of their salary. But from 2029, the amount workers can salary sacrifice without paying National Insurance will be capped at £2,000 a year. This means those wanting to add any more to their pensions via salary sacrifice will have to pay more tax, and those earning a middle-income wage are set to be the worst hit.
Coupled with that, there is also a freeze on income tax thresholds and the level at which graduates repay their student loans.
This triple whammy from the Chancellor means those workers who take home between £40,000 and £50,000 annually are likely to suffer the most, according to pension experts.
Some of those employees will have to pay £256 more in National Insurance from 2026, according to analysis by pensions consultancy LCP, reports the Daily Mail.
This is because employees earning up to £50,270 pay the full rate of employee National Insurance. It drops to 2% on earnings above this amount. For example, an employee with a £40,000 salary will not pay any more in National Insurance if they sacrifice 5% of their income into a pension, but will have to shell out £160 more if they double their contribution.
Basic-rate taxpayers will have to pay 8% in National Insurance contributions on any amount sacrificed above the £2,000 cap. Those earning over £50,270 will pay just 2 per cent.
An employee with a £40,000 salary will not pay any more in National Insurance if they sacrifice 5 per cent of their income into a pension, but will have to shell out £160 more if they double their contribution.
The most affected are those earning £52,000, who make a 10% contribution, and will have to pay an extra £256 in National Insurance from 2029. But someone earning just £4,000 more and contributing the same will pay £72.
Rachel Reeves also froze the student loan repayment thresholds for those with Plan 2 student loans, who attended university between 2012 and 2023, affecting up to 15 million students.
Graduates pay 9% of their earnings above the threshold, which means that once the new salary sacrifice rules come into force, they will have to pay the same amount on their pension contributions if employers abandon salary sacrifice.
Tim Camfield, principal at pension consultants LCP said: “To make matters worse, the repeated freeze of tax thresholds could lead many of them to become higher-rate taxpayers for the first time in the coming years. This is truly a triple whammy for this group.”