Salary sacrifice protections for middle earners overturned by House of Commons

Rachel Reeves proposes to limit the National Insurance saving for employees and employers from salary sacrifice for pensions contributions to the first £2,000 pa sacrificed from April 2029.

During the passage of the legislation through parliament members of the House of Lords made a number of amendments that would have reduced the impact of the measure. These included raising the cap to £5,000 and excluding basic rate taxpayers from the measure. Last night these amendments were overturned by the House of Commons. The legislation will now go back to the House of Lords for further consideration.

Alasdair Mayes, Partner and pensions tax specialist at LCP, said: “Our analysis shows the proposed £2,000 cap on NI relief for pension contributions will have a disproportionate impact on middle earners. In these uncertain times it’s important that individuals save enough for their retirement and salary sacrifice has proved an effective incentive for them to do so. Whittling away at the tax incentives for pensions savings, whether through applying inheritance tax to pension savings or reducing tax relief risks creating another generation with insufficient savings. This will store up problems for future governments.

"The OBR has shown that nearly half of salary sacrifice is for bonuses rather than regular contributions from pay. This suggests that a higher cap such as £5,000 or exemption for basic rate taxpayers would be well targeted on protecting those who use salary sacrifice to reduce the cost of regular pension contributions but would still capture the Government’s target of higher earners who receive significant annual bonuses.”

LCP analysis on the disproportionate impact of the measures on middle earners can be found here