Over the weekend, rumours emerged that the Chancellor is planning to cap the tax benefits of salary sacrifice schemes at a new threshold of £2,000 above which pension contributions would incur National Insurance.
David Brooks, Head of Policy at leading independent financial services consultancy Broadstone, commented:
“The proposed £2,000 cap on salary sacrifice is a classic case of government departments not joining the dots.
“On one hand, the Pension Schemes Bill is packed with positive reforms: fewer schemes, larger asset pools, a unified value-for-money framework, and better support for savers both during the accumulation phase and as they transition into retirement.
“But this salary sacrifice change risks undermining that progress.
“It hits the pension growth phase directly. People will feel poorer and many will reduce their contributions. Inertia might help some stay the course, but others, especially those aiming to save enough for a decent retirement, may scale back. Employers will also feel the pinch.
“Lower earners and those on auto-enrolment minimums may not notice much. But anyone contributing meaningfully, often encouraged by planners and policy alike, will.”
Agreeing with Brooks that tinkering with Salary Sacrifice arrangements would be confusing and a backward step, Claire Trott, Head of Advice at St. James’s Place, says: “Salary sacrifice for pensions is one of the few remaining and most effective ways to help people save for retirement. By passing on National Insurance savings, it makes contributing easier and more affordable for both employers and employees.
“However, adding limits or extra monitoring risks creating confusion and deterring savers. If people fear getting it wrong or see their take-home pay fluctuate, many could opt out altogether. Tinkering with long-standing savings systems rarely ends well – any changes must be simple, clear and fair for everyone.”
