Friday 28 November 2025 7:43 am
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Friday 28 November 2025 11:24 am
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Salary sacrifice legislation is set to be rushed through Parliament
Chancellor Rachel Reeves is to rush through laws to enact her Budget, in a bid to reassure nervous markets that tax increases will be implemented even if they are not set to take effect for several years.
Legislation to raise tax on pension contributions made through salary sacrifice schemes is expected to be introduced before Christmas, according to reports in the Financial Times, despite the changes not being applied until April 2029.
Salary sacrifice schemes allow workers to take a pay cut in return for higher pension contributions, and are particularly popular for workers with young families who wish to stay under the £100,000 threshold to keep their free childcare hours.
But in a shake-up to the pensions system, salary sacrifice schemes have been pared back, with the exemption capped at £2,000 per employee, per year, from April 2029, arguing that the scheme does not benefit those on the minimum wage.
The raid is expected to raise £4.8bn in the 2029 to 2030 financial year, with an additional £2.5bn the following year.
Don’t lose your nerve
While Budget measures are typically enacted through a general finance bill, a separate piece of legislation covering the national insurance change will be introduced in the “next few weeks”, a Treasury official reportedly said.
One minister said, “We want markets to know this is all definitely happening, there can be no doubt about that.”
Reeves is also looking to legislate quickly to close a loophole on “low value imports”, which online retailers use to ship low-value goods into the UK free of tariffs, despite the changes not due to take effect until April 2028.
A Treasury official said: “We’ve got to get this right, but if we can do it earlier, we will.”
Read more
Reeves eyes clampdown on salary sacrifice in latest stealth tax on high earners
Ministers noted the plan had always been to pass early legislation to enact the Budget, in order to ensure shaky markets did not lose their nerve on tax rises ahead of the general election, which must happen by summer 2029.
Who does it benefit?
Approximately 7.7bn workers use salary sacrifice, with employees of most of Britain’s largest employers taking advantage of the scheme.
Industry figures have voiced confusion over the Treasury’s decision to strip away an incentive that encourages increased pension saving at a time when the country is experiencing a retirement crisis.
However, it is said that Reeves argued that the system’s design ultimately does not assist basic taxpayers, noting that it mainly benefits high earners, in particular “those in the financial services sector putting their bonuses into pensions tax-free”.
A Treasury official said: “These reforms will protect low and middle earners and bring fairness to a scheme that is disproportionately benefiting the wealthy and exploding in cost.”
But, according to analysis from investment platform Finder, the changes will hit ordinary workers the hardest.
An average earner, typically on £39,039, who is putting away the recommended 15 per cent on a salary sacrifice scheme, 12 per cent personal allowance and 3 per cent employer contributions, could lose £215 from their yearly take-home pay due to the new cap.
It would see those on £52,720 impacted the most, losing £341.80 per year.
In contrast, someone on a salary of £75,000 per annum, saving 15 per cent, would only see their take-home pay reduce by £140, as high earners are only hit with a 2 per cent national insurance charge.
Read more
Salary sacrifice cuts could damage retirement savings
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