It is not every day that I find myself sitting in the House of Commons. But when I was invited to attend the debate on the government’s decision to cap relief on salary sacrifice pension contributions, I wanted to hear exactly how it planned to justify it.
For readers unfamiliar with the mechanics, salary sacrifice allows an employee to give up part of their gross pay in exchange for work-related benefits. Because the sacrificed amount is removed before tax and national insurance are calculated, both the employee and employer usually pay less national insurance. For many households it is one of the simplest ways to make pension saving more affordable without reducing take-home pay as much as it otherwise would be.
On Wednesday the Treasury secretary Torsten Bell mounted a robust defence of the government’s plan for a £2,000 cap on the amount of salary that you can sacrifice while still saving on national insurance. You will still be able to sacrifice higher amounts of salary that will go into your pension before tax, but the national insurance relief will be limited from April 2029.
• How much will the salary sacrifice pensions raid cost you? Use our calculator
Bell’s argument rested on three main pillars. First, that the present system is expensive and unsustainable. Second, that the cap will protect ordinary workers. And third, that salary sacrifice has not been shown to meaningfully increase pension saving, particularly because employers often retain their tax saving rather than passing it on to staff.
There is some merit in each of these points. But taken together, they also expose some uncomfortable omissions.
Bell’s central case was straightforward. The cost of national insurance relief linked to salary sacrifice pension contributions is forecast to rise sharply over the next decade. Without intervention, he argued, this represents a growing and open-ended cost to the Treasury. So it is clear: this is a revenue-raising measure, not a technical tidy-up.
That honesty is welcome. Where the argument becomes more strained is on fairness.
Bell pointed out that the self-employed are among the groups most likely to under-save for retirement, and that salary sacrifice is unavailable to them. Except that I am self-employed and use salary sacrifice.
He is right that some self-employed sole traders cannot sacrifice salary in the traditional sense. But many who think of themselves as self-employed are actually directors of small limited companies, paying themselves via PAYE. In that set-up, employer pension contributions are a core part of remuneration planning. To suggest that salary sacrifice is simply not an option for the self-employed is, at best, incomplete.
Bell also argued that a £2,000 cap protects ordinary workers. Treasury analysis suggests that most people using salary sacrifice sacrifice less than the threshold. That may be technically correct, but it misses where the real impact sits.
The people most likely to breach the cap are not City high-flyers. They are middle-income earners, often in their forties and fifties, trying to catch up on pension saving after years of frozen tax thresholds, rising living costs and patchy wage growth. These are not people exploiting loopholes. They are responding rationally to a tax system that already takes a large share of every additional pound they earn.
Bell questioned whether salary sacrifice actually increases pension saving at all. On one level, he has a point. Research shows many employers do not pass on their national insurance saving to their employee through higher pension contributions. Often, the saving is absorbed into general business costs.
• Why workers on £52,000 will be the biggest losers of Rachel Reeves’s budget
But that is not the whole story. Salary sacrifice reduces employee national insurance, making pension contributions feel less painful in the here and now. That psychological effect matters. When saving becomes visibly more expensive, some people will save less, even if the long-term maths still works. The Office for Budget Responsibility itself expects much of the additional cost to employers to be passed back to workers over time through lower wages or reduced benefits.
Getting rid of that national insurance saving will also reduce the attraction of salary sacrifice, particularly for employers, and the danger is that many will stop offering it.
Then there is the impact on business. Ministers argue that a long lead-in period, with implementation not due until 2029, gives employers time to adjust. But time does not change the underlying economics. For small businesses already grappling with higher employer national insurance and weak growth, adjustment means trade-offs. Lower employer contributions. Slower wage growth. Fewer benefits. The government’s own impact assessment accepts that hundreds of thousands of employers will be affected.
The bigger question is why pensions were chosen as the lever to pull.
Most other salary sacrifice perks lost their tax advantages years ago. Pensions remain one of the few areas still strongly incentivised, precisely because the UK faces a chronic retirement adequacy problem. Around half of savers are on track to miss recommended income targets. Pension contributions are falling, withdrawals are rising, and uncertainty around tax-free lump sums has only added to the unease.
None of this is to deny the fiscal pressure the government faces. But policy choices reveal priorities. This is a short-term gain for the Treasury that risks long-term pain for taxpayers, future pensioners and, ultimately, the state.
If ministers want to be honest, they should say this plainly. It is easier to tax pension saving than to tackle the structural failures of the system. Capping salary sacrifice may balance a spreadsheet. It does not balance the country’s long-term interests.
Antonia Medlicott is the founder of the personal finance site Investing Insiders