Chancellor of the Exchequer Rachel Reeves presented her second budget last month which saw taxes hiked for millions of people. One key fund-raising area that was targeted was salary sacrifice pension schemes used by workers to pay towards their retirement.

Under the changes, which come into effect from April 2029, anyone using salary sacrifice to pay into their pension will need to pay National Insurance contributions (NICs) on any amounts over £2,000 a year. The Treasury estimates there are approximately 7.7 million people using salary sacrifice for pensions, making the changes to the rules a potential concern for approximately 20 per cent of employed adults.

Founder and Managing Director of finance education specialists, Investing Insiders, Antonia Medlicott, says people can take three steps and potential save themselves thousands of pounds.

Avoid throwing the baby out with the bathwater

Antonia says there are several good reasons not to abandon salary sacrifice, at least for now. She says: “Firstly, around 75 per cent of people who use salary sacrifice won’t be affected by this cap. It’s targeted at high earners, so if, for example, you earn the average UK salary of £37,000, you could put up to 5 per cent of that into your pension every year through salary sacrifice, and not be affected, as that still puts you below the £2,000 mark.

“Secondly, the cap isn’t a cap on contributions, just on how much can be contributed without needing to pay NICs. And, lastly, this new rule won’t come into effect until April 2029. So there’s no reason not to make the most of the scheme before then.

“The maximum you can put in each year (across all types of pensions) is £60,000, or 100 per cent of your UK earnings, which is lower. It can even be higher if you haven’t made full use of your allowance in the previous three years.”

Workplace pensions still smart way to save for retirement

“There is nothing changing in the treatment of the contributions made through personal pensions, or workplace pensions after tax has already been taken from your payslip,” says Antonia. “Salary sacrifice is a different scheme, which some employers offer, and which employees can sign up to if they choose.

“For personal (private) pensions and workplace contributions that aren’t part of a salary sacrifice scheme, nothing is changing. So you’ll still get full income-tax relief. While you won’t get National Insurance relief outside of a salary sacrifice scheme, workplace pensions continue to be a beneficial way to save for retirement, as your employer is also helping to fund your retirement.”

Other ways to lower your taxable income

Antonia says: “Many people use salary sacrifice to reduce their taxable income, avoiding painful cliff edges like the loss of Child Benefit at £60,000, and the loss of their tax-free Personal Allowance at £100,000,” says Antonia. “If pension contributions have been the main strategy you’ve been using to achieve this, you may have to look at other ways to reduce your taxable income once the new £2,000 cap comes into effect.

“Certain schemes continue to be exempt from income tax and NICs altogether, while some salary sacrifice arrangements are taxed as a ‘benefit in kind’, so the National Insurance exemption is irrelevant anyway.”

She said as far as it is known some other schemes will remain exempt from both National Insurance and income tax. These include:

• Workplace nursery schemes
• subsidised canteen meals
• Cycle to Work
• employer-provided childcare vouchers (although these can only be accessed by existing members)

She says: “Electric vehicle (EV) schemes could also be an option. EVs are a ‘benefit in kind’, meaning they must be taxed – but the government has set the rate deliberately low.

Antonia adds: “There are more than three years until this change comes into effect. Planning now could mean you don’t lose out later on.”