A new £2,000 cap on pension salary sacrifice that is exempt from national insurance has raised concerns among the Conservative Party, who argue that this change will disproportionately impact lower-income workers. The legislation has successfully passed through the House of Commons, securing a third reading by a vote of 316 to 194, which translates to a majority of 122 votes.
According to the provisions of the National Insurance Contributions (Employer Pensions Contributions) Bill, any salary sacrifice pension contributions that exceed the £2,000 threshold will no longer benefit from national insurance exemptions starting from April 2029. Treasury minister Torsten Bell referred to these new measures as "inevitable," citing projections that the expense of the current system is expected to triple from its inception in 2017 to the end of the decade.
Bell described the reforms as both "pragmatic and balanced," reassuring savers that pension contributions would still provide significant tax advantages. However, the Conservative Party has criticized the move, characterizing it as a "cynical measure" aimed at generating savings in an election year.
Shadow Treasury Minister Mark Garnier voiced concerns about the timing of this legislative change, stating, "The alteration seems strategically scheduled to maximize revenue for the fiscal year 2029-30—the year that figures prominently in the Chancellor's fiscal regulations. This could result in an extra £4.8 billion to address the fiscal shortfall anticipated by then, all while undermining a lifetime of savings opportunities for just one year of revenue."
Garnier further expressed his apprehension that the proposed changes would unfairly burden lower-paid employees and those with student loans, urging the government to consider an exemption for basic rate taxpayers from the £2,000 annual cap.
He explained, "This change will hit basic rate taxpayers particularly hard because they are subject to an 8% national insurance contribution on amounts exceeding the £2,000 limit, in contrast to higher earners who only face a 2% charge. Moreover, those with student loans earning above the repayment threshold will face an additional 9% deduction from their salaries, compounding the financial strain."
Garnier emphasized, "At a time when we should be encouraging individuals to save towards their future, the government appears to be taking steps that will severely penalize them—especially those earning lower wages. Additionally, this change will have an even greater negative impact on younger generations compared to those who benefited from free university education."
He pointed out the challenges faced by younger individuals today, noting, "Many cannot afford to purchase homes, they bear the financial burden of university tuition, and the government's policies have made it increasingly difficult for them to secure jobs due to job-related taxes. At a time when we are striving to encourage retirement savings, the government is making it harder for people to set aside money for pensions."
Garnier indicated that approximately 850,000 basic rate taxpayers utilizing pension salary sacrifice would be impacted by this new cap. In response, Bell attempted to reassure MPs by stating that 95% of those earning less than £30,000 would remain unaffected by the changes, emphasizing that the delayed implementation provides ample time for workers, employers, and pension providers to adjust accordingly.
He clarified that those who under-save for retirement, including self-employed individuals and lower earners, typically do not utilize salary sacrifice or are much less likely to do so than other demographics.
The minister stated in the House of Commons that the reforms introduced by the Bill are urgently needed to reduce borrowing costs and alleviate energy bills. He added, "If we continue to defend tax reliefs that lack justification and whose costs are rising significantly, we will inevitably face higher taxes for everyone else, which is not a situation we are willing to tolerate."
A Conservative amendment aimed at exempting basic rate taxpayers from the £2,000 cap on pension salary sacrifice was defeated, with 326 votes against and 191 in support—a margin of 135. The Liberal Democrats have urged the government to calculate and disclose the projected lifetime value of individuals' pensions before and after the Bill's changes are implemented.
To complement the introduction of the Bill, Mr. Bell noted that the government has published a tax information impact note detailing the policy's implications for public finances, the economy, individuals, and businesses. He also remarked that the Office for Budget Responsibility does not anticipate any significant impact on savings as a result of the changes outlined in the Budget 2025.
The Liberal Democrats' proposed amendment was similarly rejected, with 317 votes against and 195 in favor—resulting in a majority of 122. The Bill will now proceed to the House of Lords for further scrutiny, although it is expected to be classified as a money Bill, which would preclude the upper house from blocking or amending it.
