Experts warn that Rachel Reeves’ decision to cap the National Insurance benefits of pension salary sacrifice at £2,000 a year risks destroying one of the UK’s most widely used workplace savings tools and could potentially force smaller employers to stop hiring staff or cut staff benefits.
The Treasury expects the change to raise £4.7 billion in 2029/30 from employees and employers who currently benefit from unlimited NI relief when pension contributions are made through salary sacrifice. But financial planners, accountants and human resources specialists say the policy could have far-reaching consequences for retirement savings, recruiting and business investments.
Anita Wright, a chartered financial planner at Ribble Wealth Management, described the move as a clear revenue-boosting move disguised as reform.
“The so-called ‘pension salary sacrifice raid’ restricts the benefits of NI that employees and employers have rightfully enjoyed for years,” she said. “A return of £4.7 billion shows how widespread the system is.”
Simon Thomas, managing director of Ridgefield Consulting, said the cap undermines a tool that is particularly valuable for fast-growing companies.
“Salary sacrifice was a legitimate and effective way to increase retirement savings while helping employers compensate their employees in a tax-efficient manner,” he said. “For many scale-ups and start-ups that cannot compete on overall salaries, increased pension contributions are a crucial factor in attracting and retaining talent.
“The £2,000 cap reduces tax efficiency so significantly that many companies may abandon the schemes altogether. Combined with higher employer NI over the last year, this is putting pressure on margins and limiting their ability to recruit competitively.”
Smaller employers say the change will add further costs at a time of rising wages, business rates and energy bills.
Kate Underwood, founder of Kate Underwood HR & Training, said the move will put the brakes on recruitment: “Pay cuts were one of the only ways to keep the numbers remotely reasonable. Now employers will pay more NI for anything above the cap. Most small businesses won’t start laying people off for that alone – but they will slow recruitment, delay replacing leavers and cut benefits.”
It makes it harder to attract experienced candidates because you have simply lost one of the few tools available to build a competitive package.”
Consumers saving for retirement also face higher costs.
Philly Ponniah, a licensed wealth manager at Philly Financial, said many workers rely on sacrifices to manage their finances.
“Capping victims at £2,000 is a big change. It raises billions precisely because so many rely on the system. Removing relief past this point means higher NI for employees and employers – effectively a cut in take-home pay at a time when budgets are already tight.
This will not stop pension savings, but it will become more expensive, especially for middle earners. In the long term, it weakens one of the few instruments that support consistent savings.”
David Stirling, independent financial adviser at Mint Wealth in Belfast, warned that the long-term impact on pension funds could be serious.
“This may look smart on paper for the Chancellor, but in practice higher earners will lose the biggest benefit of pension provision, employers could cut their contributions and long-term pensions could shrink by tens of thousands.
All in the name of “fairness”, savers now face a bureaucratic minefield as the Treasury pockets additional NI billions.”
In general, experts agree that the policy is not just a tax increase, but a structural change – a structural change that is leading to falling savings rates, increased labor stagnation and further financial pressure on companies that are already struggling with rising costs and weak demand.
