Friday 05 December 2025 12:52 pm
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Over three million people are set to be hit by salary sacrifice changes
Millions of UK pension savers are set to be hit by salary sacrifice changes unveiled in the Budget, according to new figures.
According to figures published by HM Revenue and Customs (HMRC), an estimated 7.7m employees use salary sacrifice to make pension contributions.
This means employees effectively take a pay cut in exchange for higher pension contributions, reducing total income and tax bills, dragging them back under the £100,000 threshold.
Of the nearly 8m people using the schemes, 3.3m sacrifice more than £2,000 of their salary or bonuses, putting them at risk of being subjected to changes unveiled in the Budget.
Slapped with tax
In a major shake-up to the system, Chancellor Rachel Reeves pared back salary sacrifice schemes, with the tax free exemption capped at £2,000 from April 2029.
Contributions above the £2,000 threshold will be treated as ordinary pension contributions and be subject to standard national insurance rates of eight percent on salaries under £50,270 and two per cent on any income above that.
The change has been met with fierce criticism from the pension industry, who expressed confusion at the decision to strip away pension savings incentives when the country is experiencing a retirement crisis.
Sir Steve Webb, former pensions minister and partner at Lane Clark and Peacock, said: “At a time when the nation as a whole has a significant ‘under-saving’ problem, this change will make matters worse.
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“On the government’s own estimates, around three in seven of the workers who use salary sacrifice to pay into their pensions will be hit by the change, whilst employers will face a bigger hit because of their higher rate of national insurance contributions.”
Reeves argued the system does ultimately not benefit middle earners or basic rate tax payers, with high earners, in particular “those in the financial services sector putting their bonuses into pensions tax free” more likely to take advantage.
But according to analysis by Finder, those on £39,039, which is the UK average, would lose £215.
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, due to high earners only being hit with a two per cent national insurance charge.
HMRC guidance
The HMRC document said: “This measure is expected to have an impact on 290,000 employers who operate salary sacrifice arrangements… who will now need to account for relevant pension contribution amounts and report and pay class one national insurance contributions on these, where appropriate.”
The document also noted the rise in costs caused by the schemes, which was forecast to treble to £8bn by 2030 if no changes were made.
The scheme overhaul is predicted to raise £4.7bn for the Treasury in 2029 and £2.6bn the following year.
Read more
Autumn Budget: Salary sacrifice pension contributions capped
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