The cap on the salary sacrifice scheme will weaken saving incentives for young workers.
Rachel Reeves has imposed a cap on salary sacrifice schemes in a move that will raise £5bn for the Treasury in 2029 when it comes into place, according to the Office for Budget Responsibility.
“Salary-sacrificed pension contributions above £2,000 will be treated as ordinary employee pension contributions in the tax system,” confirmed the OBR report.
The change is scheduled to take effect shortly before the general election in 2029, raising the possibility it may not be implemented at all.
“It is not certain it will ever happen,” said Tom McPhail, an independent pensions expert and former head of policy at Hargreaves Lansdown . The delay, he added, is intended to give employers time to adjust their payroll systems and minimise disruption.
Previously, businesses and their employees were exempt from paying National Insurance on all contributions made to workplace pensions. Under the new rules, that exemption will apply only to the first £2,000 of contributions each year.
National Insurance is charged at 15 per cent on earnings below £50,270, and 2 per cent on income above that.
From 2029, employees will pay National Insurance on every pound they contribute to their pension above the £2,000 cap. An employee earning £45,000 and contributing 5 per cent to their pension would pay roughly £30 more in National Insurance each year.
Their employer would also face an additional £34 in contributions, according to the accounting firm RSM UK.
The change will weigh on future pensioners. An employee earning £45,000 would save about £135 a year; at £35,000, the saving falls to roughly £95.
Lower contributions will hit younger workers hardest, since they already face weaker earnings prospects than their parents.
The government estimates 14m Britons are under-saving for retirement, increasing the likelihood that more people will rely on benefits and put pressure on future spending.
Last week a third of employers warned they would cut staff pension contributions if the cap is introduced. Many are also expected to slow or freeze hiring to offset higher costs, a shift that risks pushing unemployment higher.
Nearly half of UK firms have also warned they will scale back employee benefits when the measure is introduced.
“It is hard to predict how employers and employees will respond,” Mr McPhail said. “But it is unlikely to affect entry-level jobs,” he added, noting that the measure will primarily hit those earning above £40,000.
Unemployment already stands at 4.8 per cent, a four-year high. More than 1mn young people are not in education, employment, or training, and 100,000 jobs have been lost in the past year.
The OBR expects the unemployment rate to hold at its current level until 2027. Business profits, meanwhile, are forecast to fall to 10 per cent in 2026, down from 12.5 per cent in 2022.
