Brits have been urged to renegotiate their pension instead of asking for a full pay rise following Rachel Reeves’ tax raid. The Chancellor announced a £2,000 cap on tax-free savings through salary sacrifice pension schemes in her Autumn Budget.
The changes will impact an estimated 7.7 million people, approximately 20% of the workforce, when they take effect from April 2029. From then on, any savings above £2,000 will be subject to National Insurance, which is charged at 8% on earnings less than £50,270, at 2% above that, and 15% for employers.
Scott Gallacher, director of financial services firm Rowley Turton, urged any affected employees to negotiate their pensions during pay rise discussions.
He told Sky News: “Instead of giving a full salary increase, employers can direct part of the rise into higher employer pension contributions. This isn’t salary sacrifice in the traditional sense, but it achieves a similar outcome and is more likely to remain outside future restrictions.
“Planning pay and benefits in this way over the next few years should help employees maintain tax-efficient pension funding long after the new cap takes effect. The key is to start planning now, before it becomes a problem.”
The Treasury said the change would mainly impact higher earners. It said: “The cap means 74% of basic rate taxpayers, and their employers, currently using salary sacrifice will be unaffected by this change.”
Under Labour’s plan, someone earning the UK average wage of around £38,100 who makes a 5% contribution would not pay any further tax.
However, if they increased contributions to 6%, they would breach the new £2,000 cap by £286, and they would end up paying £22.88.
For anyone who wants to contribute more to their pension, the figures continue to rise. Someone on a £50,000 salary who contributes 8% of their salary to save £4,000 annually would lose £160 of it to tax.
However, Charlene Young, savings and pensions expert at AJ Bell, urged: “Whatever you do, don’t stop your pension contributions.”
She said that despite the NI savings being capped, the pension will still be exempt from income tax, which she said would reduce taxable income.