The Government’s plan to cap tax-free salary sacrifice on pension contributions is expected to place pressure on millions of UK workers.

In the November Budget, Rachel Reeves announced that from April 2029, salary-sacrificed pension contributions will only be free from National Insurance (NI) for the first £2,000 a year.

Adam Caplan, Director at FFT Accountants, says middle-earners are likely to feel the strain the most.

“Mid-earners will be hit by this policy together with the freeze in thresholds, adding more financial pressure to those already struggling with paying higher taxes.

“Higher earners who look to top up pensions with bonuses will also notice the effect of the policy change.”

According to Government estimates, the cap will cost the average employee £84 in additional NICs in the first year of operation in 2029-30.

Concerns are already forming about whether the policy will discourage pension saving.

“Changes to salary sacrifice, rules on Inheritance Tax for pensions and the adjustments to ISA rules will all inevitably affect the way people save and plan for retirement,” Adam says.

“Recent research reaching the headlines has suggested the changes will delay the UK retirement age because workers feel less encouraged to put money into pensions.”

Employers are also weighing up the consequences of the cap.

“Employers may look to rework their arrangements to take advantage of there being no National Insurance on employer contributions, just the employees’ contributions,” he says.

“Some companies may absorb the cost to encourage staff to save for the future, although most likely any rise in cost will be trimmed from elsewhere.”

Adam believes that the new policy risks widening existing gaps in retirement savings.

“Higher-paid staff may switch to alternatives and take financial advice, while mid-earners may save less for their retirement funds when the policy is enforced,” he says.

There may be some short-term responses for those who want to prepare and mitigate the impact of the policy.

“Options to consider include switching to employer pension contributions, assuming that further details when released do not negate this option,” Adam explains.

“There is also scope for some individuals to make larger payments or sacrifice more in the years leading up to 2029.

“However, we understand that larger contributions will not be possible for everyone, particularly those already struggling with financial pressures, so it is only a viable solution for those who can afford to do so.”

Clear internal communication will be required of businesses as the changes get closure.

“It is a change made by the Government, so employers should inform their staff as early as possible so they can begin to think about their own arrangements,” Adam says.

“Make sure your staff understand what it might mean to them, or if they will be affected at all, as currently only around 20 per cent of the workforce use the salary sacrifice scheme to pay into a pension.

“You should also reiterate that salary sacrifice will still be available for up to £2,000 without incurring National Insurance contributions, so it remains a sensible and efficient way to save for retirement.”

HR and payroll teams will need to ensure their systems can cope with the shift.

“Software needs to be up to date so it can deal with any change in regulations,” Adam says.

“Keep communicating with staff and let them know what the options are. It is three years away, so most planning will probably take place in the final year before implementation, but typically the earlier plans are made, the better the options individuals will have available to them.”

Adam believes the direction of recent changes to salary sacrifice should prompt further reflection.

“The general flow of policy and its impact on longer-term retirement planning does not currently feel very positive,” he says.

“It will be interesting to see how the policy is monitored and whether there are any stings in the tail which make it harsher than expected.”

FFT Accountants works closely with businesses across Greater Manchester and beyond, helping them manage change, reduce risk and plan ahead with confidence.

For more information or to speak to an adviser, visit www.fft.co.uk or call 0161 834 2574.