Graduates to pay extra 17% on salary sacrifice above new cap from 2029

Under the new rules, any earnings sacrificed above £2,000 will no longer reduce NI or student loan repayments

Graduates paying off their student loans will pay an extra 17 per cent on pension contributions above £2,000 from 2029 as a result of changes to salary sacrifice schemes.

These schemes allow you to receive a lower salary in exchange for your employer putting the difference directly into your pension, saving you national insurance (NI) contributions.

In last year’s autumn Budget, Chancellor Rachel Reeves announced that salary sacrifice will be capped at £2,000 per year from 2029. The changes will raise around £7.3bn in tax revenues, according to the Office for Budget Responsibility (OBR).

New FeatureIn ShortQuick Stories. Same trusted journalism.

The move will primarily impact middle to high-earners who use salary sacrifice to reduce their tax bill. But it has an even bigger impact on graduates repaying student loans who pay more than £2,000 into their pensions via these schemes.

That is because when you use salary sacrifice to reduce your pension as a graduate, you save on both NI and student loan repayments, as student loan deductions are made after your gross income is reduced.

Basic-rate taxpayers currently pay 8 per cent NI, while student loan repayments on Plan 2 loans – those taken out after 2012 – are charged at 9 per cent of earnings above £28,470.

Combined, graduates who use salary sacrifice retain 17 per cent more of every pound contributed to their pension.

Under the new cap, any salary sacrificed above £2,000 will no longer reduce NI or student loan repayments, meaning graduates will pay an extra 17 per cent tax in total on any salary sacrificed over £2,000 per year.

If someone with a Plan 2 student loan sacrificed £5,000 through salary sacrifice, the £3,000 above the cap would lose both 8 per cent NI savings and the 9 per cent student loan reduction, costing them an extra £510 in tax.

Steve Webb, partner at pension consultants LCP, explained: “For some groups of workers, the advantages of salary sacrifice go beyond the NI savings.

“Graduates who face student loan repayments at 9 per cent above a threshold also benefit when their gross pay is reduced because of salary sacrifice arrangements.

“Even if they may face NI on pension savings over £2,000 post April 2029, graduates may want to persuade their employers to maintain the arrangement; otherwise, they could face an even larger loss than non-graduates from the new policy”.

A Treasury spokesperson said: “Salary sacrifice costs were set to treble to £8bn as high earners piled in huge bonuses without paying a penny in tax – a taxpayer‑funded perk largely benefitting the better off.

“Our fair reforms protect 95 per cent of workers earning under £30,000 who use salary sacrifice, including those making student loan repayments, and simply bring salary sacrifice above £2,000 into line with other pension contributions – with only those making the very largest pension contributions affected.”

Employers could cut contributions over salary sacrifice cap

Graduates and other savers could also see reduced pension contributions from their employers once the salary sacrifice cap kicks in, business have warned.

That is because employers also save on NI through salary sacrifice schemes, so if this is capped, it could cost them more to pay extra into your pension.

Damon Hopkins, head of DC workplace savings at consultancy Broadstone, said: “The question is whether employers will reduce the generosity of existing schemes to offset the cost of reduced savings employers receive via pension salary sacrifice.”

The British Chambers of Commerce, an industry group that represents 50,000 companies, also told The i Paper last year that the cap will also lead to lower pay rises and hurt economic growth.

How to find out if you use salary sacrifice

If you are not sure whether you use a salary sacrifice scheme to pay into your pension, there are several ways to find out.

First, look at your payslips – if your pension contributions only appear under “employment contributions” and there are no “employee contributions”, that is a sign your employer contributes via a salary sacrifice scheme.

The minimum contributions are 8 per cent – 5 per cent from you and 3 per cent from your employer. So, if you are contributing via salary sacrifice, your payslip may just say your employer paid 8 per cent.

If you still are not sure, you can ask your employer’s HR department whether you are in a salary sacrifice pension arrangement. This information may also be in your employment contract.