Rachel Reeves confirmed today that from April 2029, only the first £2,000 of employee pension contributions through salary sacrifice each year will be exempt from national insurance contributions. Employers and employees will still be able to make contributions above £2,000, but employee contributions above this amount will be subject to employer and employee national insurance, as is the case with employee workplace pension contributions.
Antonia Medlicott, Founder and Managing Director of Investing Insiders, said before the move was confirmed: “If you earn the average UK salary of £39,039, and sacrifice £200 of your wages each month, only £166.67 would be free from income tax and National Insurance, compared to the full £200 that would have been tax-free pre-limit. Which, at the end of the year, will leave you £112 worse off. For every £100 over £166.67 that is sacrificed monthly, you’ll pay £336 extra in income tax and National Insurance contributions annually from that £1,200.”
She then recommended three moves that could soften the blow for savers, and potentially save them up to £5,000 by 2030.
Ms Medlicott said: “It’s estimated that 53% of Brits currently do not have an ISA. Instead, many choose to keep their savings in a regular savings account. But what many don’t realise is that ISAs are a great way to make your income more tax-efficient, as any interest that is earned is tax-free. With a regular savings account, you are subject to a minimum 20% tax depending on your total income.
“For example, if you maximise your Cash ISA to £20,000 each year and earn 5% interest, you will earn £1,000. But that same money, with the same interest rate in a regular savings account, would be subject to a £200 tax if you are a basic rate taxpayer and have already used your Personal Savings Allowance.”
The cash ISA limit will be reduced to £12,000 for people aged under 65 from April 2027, the Chancellor announced this afternoon.
Ms Medlicott advised: “For basic rate taxpayers, utilising an ISA will still leave them £120 better off annually, offsetting the £112 lost from the pension salary sacrifice limit.
“Another option is stocks and shares ISAs, which come with more risk but offer higher growth. This is a great option if you have more ambitious saving goals. As the current average interest rate for a one-year fixed Cash ISA is 3.89%. Whereas with a stocks and shares ISA returns are much higher, with investment growth averaging 11.66% from February 2024 to February 2025. Meaning that you could earn three times more using an S&S ISA than a Cash ISA during the same one year period.
“However, it is important to note that a stocks and shares ISAs value can go down as well as up, meaning you could get back less than you invest. The risk depends on your specific investment which is why prior research is important.”
The expert said: “When the salary sacrifice limit applies, pension contributions above £2,000 a year become taxable. But employer contributions are not affected in the same way.
“So you could negotiate with your workplace to see if they would increase their contribution to your pension pot.
“Employer contributions avoid tax and National Insurance entirely, so that’s a good way to frame it. Also, explain that this will cost them less than a pay rise and may improve staff retention.
“HR surveys are an excellent way to raise this, or alternatively, you could speak to colleagues to see if they’re on the same page.”
Ms Medlicott said: “Another risk with this new salary sacrifice limit is that you won’t meet your pension goals, which could delay retirement. So consider a self-Invested personal pension, which allows you to have greater control over your pension by choosing how it’s invested.
“Not only this, but for basic tax payers, for every £100 you put in, the government will contribute £25. Meaning if you put £100 into a SIPP a month, you will end up with an extra £300 each year.
“All investment growth inside a SIPP is also tax-free, and from the age of 55 (57 from 2028) you can take 25% of your pension pot also tax-free. Meaning it won’t just help you reach your pension goals, but could accelerate the speed to your retirement.”
The Treasury said earlier today: “This change limits the benefit of salary sacrifice arrangements, which have grown significantly in recent years.
“The costs of relief through salary sacrifice relate disproportionately to pension contributions from those on higher incomes.
“It makes the system fairer and more sustainable, and means that any salary sacrificed above the £2,000 cap is treated the same for tax purposes as other pension scheme arrangements.
“Most employees making typical pension contributions and their employers will be unaffected.”