Can you help me understand the impact on my pension and pay after Rachel Reeves changed salary sacrifice in the Budget.
I currently earn £93,000. I salary sacrifice 8 per cent, or £620, of my salary into my pension every month, which amounts to £7,440 a year.
My employer puts in 12 per cent of my salary, or £930, each month into my pension too.
My take home pay each month is approximately £4,800. Could you please provide me an estimate of what it might be in future? How will the new £2,000 annual salary sacrifice cap affect someone like me?
Adam Cole, retirement specialist at Quilter, replies: It’s understandable that you are asking this question.
In the Budget the Chancellor announced a restriction on the National Insurance benefit of salary sacrifice pension contributions.
It’s a significant change for higher-rate taxpayers who rely on salary sacrifice to reduce their tax bill and boost retirement savings.
Adam Cole: Salary sacrifice remains a powerful planning tool for higher-rate taxpayers
Similarly, it has long been used by parents to lower their net adjusted income to preserve certain benefits like child benefit and government funded childcare.
At the moment, salary sacrifice works by you giving up part of your salary and your employer paying it into your pension instead.
Because that portion is never treated as taxable pay, both you and your employer avoid income tax and National Insurance on it.
That makes every pound go further and has encouraged employers to contribute more generously.
From April 2029, however, the National Insurance benefit will be capped. Only the first £2,000 per year of salary-sacrificed pension contributions will continue to be exempt from NI.
Contributions above that will still attract income tax relief, but the NI advantage will disappear for anything past the first £2,000.
> Budget salary sacrifice blow to pension savers, what will it cost YOU?
How might the salary sacrifice cut affect you?
In your case, you earn £93,000, sacrifice 8 per cent of salary into your pension, and your employer contributes 12 per cent.
Assuming that you have wage inflation up until this comes into effect in 2029/30 of 5 per cent per year, then you might be earning around £113,000.
If you continue to salary sacrifice 8 per cent into your pension then that will equate to £9,043 sacrificed per year – just over £7,000 more than the new cap.
This will attract £140.86 per year in National Insurance contributions you previously wouldn’t have had to pay.
Will your employer become less generous?
There’s also an important implication for employers. They, too, currently avoid NI on salary sacrifice contributions.
When that relief is removed above £2,000, their costs will rise particularly for staff with generous contribution structures like yours.
While the Budget does not force employers to adjust what they pay, it is realistic to expect some firms to reassess contribution rates or redesign benefits as the change approaches.
What about the £100,000 60% tax trap?
The most valuable aspect of salary sacrifice for someone in your position actually remains: its effect on your adjusted net income, which determines whether you cross the £100,000 personal allowance taper threshold.
The Chancellor notably chose not to increase this threshold yesterday, meaning more and more people are being dragged towards the 60 per cent effective marginal tax rate that applies between £100,000 and £125,140.
Once you cross £100,000, your personal allowance, worth £12,570 of tax-free income, is gradually removed. Losing it can be far costlier than the National Insurance changes announced yesterday.
If you are a parent of a young child you also lose access to a valuable 30 hours of childcare. Salary sacrifice helps protect you from that by reducing your taxable income.
If your salary rises in future, your pension contributions could be the buffer that stops you tipping over the line.
What about the child benefit trap?
The same considerations as above go for parents managing the High Income Child Benefit Charge (HICBC).
The threshold for this charge starts at £60,000, with the benefit gradually clawed back until it disappears completely for those earning £80,000 and more.
Salary sacrifice can help here because it reduces your adjusted net income, potentially keeping you below the £60,000 threshold or limiting the charge if you’re in the taper zone.
What action can you take in future?
While the NI element of salary sacrifice becomes less generous, the core benefit, which will help you avoid the £100,000 tax trap while still receiving income-tax relief on pension savings, is untouched.
For many people earning close to your level, that remains the main financial incentive.
You don’t need to change anything immediately. The shift isn’t due until 2029 and more detail may still emerge.
But being aware of how the new cap might change your take-home pay and how salary sacrifice continues to help keep you out of the personal allowance taper zone will allow you to adapt in good time.
When the time comes, you could make higher pension contributions outside of any salary sacrifice arrangement, to take you back below the £100,000 threshold.
To conclude, the announcement yesterday clipped one of the wings of salary sacrifice, particularly for higher contributions.
Yet it remains a powerful planning tool for higher-rate taxpayers like you keeping tax bills down and pension savings on track, even after the changes arrive.
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