Stay informed with free updates
Simply sign up to the UK tax myFT Digest — delivered directly to your inbox.
About 3.3mn retirement savers in the UK are set to be hit with higher national insurance charges on pension salary sacrifice from 2029, pointing to the impact of Rachel Reeves’ crackdown on the tax advantages of the schemes.
More than 40 per cent of the 7.7mn people who pay into salary sacrifice pension schemes lower their wages, including bonuses, by more than £2,000 a year at present, according to data published by HM Revenue & Customs.
In her Budget last week, the chancellor announced salary-sacrificed pension contributions above an annual £2,000 threshold would not be exempt from national insurance, warning that the current system was “not sustainable for our public finances”.
In guidance published late on Thursday, HMRC said it expected the measure to affect 290,000 employers operating salary sacrifice arrangements, which allow workers to give up some of their headline salary and convert the excess into higher pension contributions.
The tax authority forecast one-off costs for businesses of £20mn and an extra £30mn a year for administration of the changes, with changes to HMRC’s own systems expected to cost “in the region of £1.9mn”.
The crackdown on pension salary sacrifice schemes — which formed a key part of Reeves’ £26bn tax-raising Budget — will generate £4.7bn for the Treasury in 2029-30, according to government estimates.
Revenue is expected to fall to £2.6bn the following year because some higher- and additional-rate taxpayers are expected to change their pension arrangements and claim tax relief above the basic rate through a self-assessment tax return in the year after the new rule takes effect.
The policy change was criticised by pension industry bodies, which warned it would add to the burden on businesses and ultimately lead savers to cut their pension contributions, despite ministers trying to encourage people to put away more money for retirement.
Sir Steve Webb, former pensions minister and now a partner at consultancy LCP, said the crackdown would affect “around three in seven of the workers who use salary sacrifice to pay into their pensions”.
“At a time when the nation as a whole has a significant ‘under-saving’ problem, this change will make matters worse,” he added.
Most other types of salary sacrifice schemes closed in 2017, on the back of a government push to raise revenue.
HMRC said the cost of keeping the national insurance relief for salary-sacrificed pension contributions had increased “markedly” from £2.8bn in 2016-17 to £5.8bn in 2023-24, the latest year for which data is available.
Without changes, the bill would “nearly triple to £8bn by tax year 2030-31”, HMRC said.
Employees who at present choose salary sacrifice to receive means-tested benefits such as tax-free childcare — which is lost once one parent’s net-adjusted pay tops £100,000 — will still be able to do so from April 2029. But they will not receive national insurance relief on contributions over £2,000.
Simon Bocca, founder of PayCaptain, a payroll company, said the measures would be detrimental to retirement savings, particularly for women.
“Women who already have smaller pension pots and interrupted careers will find it harder and more costly to close the gap, just deepening the gender pension gap even further,” he added.