Higher earners and private sector workers are set to bear the brunt of the government’s planned tax changes to salary sacrifice pension contributions, analysis from the Institute for Fiscal Studies (IFS) has found.

The research showed that employees in the top 10 per cent of earnings are far more likely to be affected by the reforms announced in last November’s Budget, which will see salary sacrifice pension contributions above £2,000 become liable for both employer and employee National Insurance contributions (NICs) from 2029/30.

The Office for Budget Responsibility (OBR) has said it expects the measure to raise £2.6bn a year by the early 2030s.

The changes passed into law last month, as the National Insurance Contributions Act received Royal Assent alongside the Pension Schemes Act.

The IFS said 48 per cent of employees in the highest earnings decile currently make salary sacrifice contributions above £2,000, compared with fewer than 1 per cent of employees in the bottom fifth of earners.

Overall, around 15 per cent of employees make salary sacrifice contributions above the threshold.

The report also suggested that the majority of the additional NIC burden would fall on employers, although this would likely be passed on to employees through lower wages over time.

According to the analysis, the average additional NIC liability for employees in the top earnings decile and their employers would be almost £1,000 a year, with 69 per cent of the total extra NIC liability borne by this group and their employers.

The IFS also found that the reforms would disproportionately affect the private sector, where salary sacrifice arrangements are more widely used.

It revealed that 18 per cent of private-sector employees make salary sacrifice pension contributions of over £2,000 a year, compared with just 7 per cent of public-sector employees.

As a result, the average yearly increase in employer NICs in the private sector was estimated at £151 per employee, more than four times the £37 increase estimated for the public sector.

Within the private sector, finance and insurance, alongside information and communication industries, were identified as the sectors most exposed to the reforms, with almost 40 per cent of employees in these industries making salary sacrifice contributions above the threshold.

Looking at the impact on households, the IFS estimated that affected households in the top income decile could lose an average of £888 a year if employers fully pass on higher employer NIC costs through lower wages.

However, around 65 per cent of households in the top decile would see no change in income because they do not currently use salary sacrifice arrangements.

IFS research economist, Matthew Oulton, said the reforms would raise “significant tax revenue principally from higher-earning private sector employees”.

However, he argued that the policy “falls short of a principled reform to the taxation of pensions”.

“It does not tackle the fundamental issue with the NICs treatment of pension contributions: the asymmetry between the taxation of employer and employee contributions,” Oulton warned.

He suggested that a more ambitious reform would have been to replace the blanket exemption of employer pension contributions from employer NICs with “a new, less generous subsidy” designed to raise similar levels of revenue.

The IFS report also warned that the reforms would add further complexity to the pensions tax system, as employers and HMRC would need to monitor whether salary sacrifice contributions exceed the £2,000 threshold.

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