As of April 2029, there will be a new £2,000 yearly cap on how much money can save into your pension through salary sacrifice schemes
Almost 2.9 million people are expected to slash their pension contributions when new salary sacrifice rules come into force.
As of April 2029, there will be a new £2,000 yearly cap on how much money can save into your pension through salary sacrifice schemes.
Salary sacrifice is where you agree to give up part of your pre-tax salary for a non-cash benefit, such as payments into a pension scheme.
As you exchange a portion of your salary before tax and National Insurance contributions are calculated, this lowers your gross salary, meaning you pay less tax overall. It also means your employer pays less National Insurance.
But new figures obtained from HMRC through a Freedom of Information (FOI) request by former pensions minister and LCP partner Steve Webb reveals millions of people are planning on cutting back on pension saving as a result of the upcoming changes.
The figures suggest 666,000 workers will be basic rate taxpayers earning less than £50,271 a year. Separate analysis by the Institute for Fiscal Studies (IFS) has estimated that one million households will be almost £900 a year worse off.
It comes after a new review from the Pensions Commission warned that 15 million people are under-saving for retirement.
He said: “The Government has presented the changes to salary sacrifice for pensions as being a relatively painless way of cracking down on a tax break mostly enjoyed by the well off. But these figures show that the effects of the policy will be far more damaging than had previously been admitted.”
He added: “At a time when the Government is running a major Commission to tackle the issue of pension under-saving, it is shocking that a separate government policy will result in over 2.8 million workers cutting back on pension saving.
“Nearly one in four of these are basic-rate taxpayers. It is hardly ‘joined-up government’ to be stressing the need for more pension saving one day and then implementing a policy that will reduce the pension savings of millions the next.”
A Treasury spokesperson said: “High earners piled in huge bonuses through salary sacrifice without paying a penny in tax – a taxpayer funded perk largely benefitting the better off.
“Our fair reforms protect 95% of workers earning under £30,000 using salary sacrifice, and as IFS analysis shows, over three quarters of under 30s will be unaffected.”
