Reeves Plans New Tax Cap On Pension Contributions In Autumn Budget

Rachel Reeves, Chancellor of the Exchequer, is expected to introduce a significant new cap on pension tax relief as part of the upcoming budget. This move will see the government limit the national insurance savings available through salary sacrifice pension schemes for both employees and employers, a change forecast to raise up to £2 billion each year. The government aims to address a sizeable gap in public finances, targeting an area viewed as a ‘low hanging fruit’ among possible tax rises.

Current rules allow employees to make unlimited pension contributions via salary sacrifice without incurring national insurance, enabling both employers and workers to benefit from lower tax liabilities. Under the proposed cap, however, only the first £2,000 of salary that is sacrificed for pension contributions each year will be exempt from national insurance. Amounts contributed above this threshold will attract the full employee national insurance rate—8 per cent for earnings under £50,000 and 2 per cent for income above that benchmark.

Experts warn that the changes could reduce take-home pay and ultimately shrink pension pots, with those saving larger proportions of their income particularly affected. For a basic-rate taxpayer earning £50,270, contributing 6 per cent of salary would result in an £80 increase in national insurance each year. If that contribution rises to £5,000—10 per cent of salary—the additional national insurance owed grows to £240.

There are also significant implications for employers. Businesses currently avoid paying the 15 per cent employer national insurance rate on salary sacrificed into pension schemes. Going forward, they will face a cap, meaning that for workers earning £50,270 who contribute 10 per cent of their salary, the employer will pay £450 more annually. Many companies are expected to pass this extra cost onto employees by reducing pension contributions or limiting future pay rises.

Industry voices have raised concerns about the long-term effects, with a third of private sector workers using these schemes as a means of saving for retirement. The proposed cap could disincentivise pension saving, particularly among higher earners and parents who have relied on salary sacrifice to mitigate harsh tax thresholds, such as the tapering of personal allowances and childcare entitlements once certain income levels are crossed. Those earning £125,000 and sacrificing £25,000 of salary could see their national insurance bill rise by £460, with some employers facing an increase of £3,450.

Pension consultants and business leaders argue the move is a backwards step at a time when saving for retirement should be encouraged. Some employers have suggested that, depending on the exact impact, they might be forced to withdraw salary sacrifice schemes altogether. The government maintains the measure is necessary to bolster public finances, but there is widespread concern that it may ultimately penalise those who prioritise saving for the future.