The pensions industry has hit back at the government's plans to cap salary sacrifice, warning that this is not only the wrong change at the wrong time and will damage pension saving, but that the initiative will not raise nearly as much as the £4.7bn forecast. 

As part of the Budget, Chancellor, Rachel Reeves, announced plans to charge National Insurance on salary sacrifice pensions above £2,000, despite repeated calls against this, with many warning that this would go against the recent work done to improve pension savings.

However, the move was branded a "tax on working people, in spirit if not in name" by Society of Pensions Professionals tax group chair, Steve Hitchiner, who warned that the changes will affect the take-home pay of millions of staff – especially basic rate taxpayers.

The Investing and Saving Alliance (TISA) head of policy for products and long-term savings, Renny Biggins, also argued that "the government is arm-wrestling itself over pensions", while Nucelus technical services director, Andrew Tully, warned that the change "sends the wrong message to savers". 
 
Pensions UK executive director of policy and advocacy, Zoe Alexander, also raised concerns over the potential impact of the cap, warning that applying National Insurance to salary-sacrificed pension arrangements above £2,000 will harm the economy, businesses and pension saving.
 
“In a recent survey of Pensions UK members, 75 per cent of respondents said they believe savers are likely or very likely to alter retirement contributions or decisions as a result of the changes," she noted. "More, not less, pension saving is needed if everyone is to have an adequate income in retirement." 

Adding to this, Quilter head of retirement policy, Jon Greer, said that the introduction of a £2,000 cap was a "deeply misguided move", at a time when the government acknowledges that tomorrow’s pensioners risk being poorer than today’s.

This was echoed by Hymans Robertson partner and head of DC corporate consulting, Hannah English, who warned that this move contradicts the government’s desire to increase pension adequacy, "eroding" the long-term resilience of workplace pensions. 

It is not just savers though, as English warned that "the decision will have hard-hitting implications for both employers and employees from 2029". 

Demonstrating the scale of the impact, the firm's modelling suggested that a medium-sized white-collar firm could see employer costs rise by around £830,000, a 1 per cent increase in total employment costs, while XL retailers and hospitality firms could see employer costs rise by £.15m, a 0.04 per cent increase.
 
"According to our research, fewer than 10 per cent of employers would be able to absorb the cost of a reduction in NI savings on pensions contributions. So this cost increase is likely to shape businesses’ workplace provision in the future," she stated. 

" The cost increase for employers could also see many of them review future pay rises, reduce pensions contribution offerings or adjust future recruitment in order to offset increases in costs. Our research suggests 43 per cent of employers may review their reward strategies as a result of the announcement." 

EY pensions consulting leader, Paul Kitson, also warned that this will also be "another material cost to businesses, who were already hit by the increase in employer National Insurance introduced earlier this year". 

"Significantly, this decision will also likely impact workers, effectively reducing the value of their pension pots, when worries around having adequate funds for retirement are already high," he added. 

Greer agreed that "employers will also feel the pain", noting that, after last year’s increase in employer National Insurance contributions, this represents a "double whammy", removing flexibility to support staff saving and stretching reward budgets even further.

And this will ultimately be felt by workers, as the OBR's own estimates suggested that 76 per cent of employer costs will be passed on to workers either through slower wage growth or through lower employer pension contributions.
 
Costs are not the only concern, as English warned that the changes will also be complex to introduce, "and it will be interesting to see how the government plans to monitor them in practice". 

"It’s no surprise that the change will not commence until 2029 - careful consideration will need to be made around the logistics of implementing the cap and providing employers time to set this up," she stated. 
 
Indeed, LCP partner, Alasdair Mayes, said that the "one piece of good news" was that implementation has been postponed to April 2029, giving employers and payroll providers time to update systems and restructure their benefit arrangements.

However, Kitson stressed that "this is still a challenging policy change for businesses", warning that while the change won’t come into effect until 2029, in practice, it may be difficult to administer, and significant time will need to be spent by businesses working out the operations, which may counteract the benefit the Treasury hopes to achieve. 

And this lead-in time could also prove a double-edged sword, giving employers time to bypass the change, and potentially limiting the amount that the policy will raise. 

Indeed, Isio employee benefits partner, Mark Jones, warned that employers will already be thinking about making plans to offset the NI salary sacrifice loss long before these changes kick in from 2029. 

"That may include changing their scheme, so they don’t pay more than £2,000 in salary sacrificed contributions or changing the balance of remuneration with higher pay rises making up for reduced contributions," he stated.

WTW director, David Robbins, agreed, warning that "how much this change ultimately rakes in is very uncertain". 

"HM Treasury’s policy costing includes a long list of reasons why this is hard to estimate, and says ‘the extent to which employers and employees will adapt their behaviour in response to the measure is particularly uncertain," he continued. 

Aptia UK president, Malcolm Reynolds, also queried whether the cap will actually work in practice, and whether the long lead in time of four years is actually an indication that the Chancellor hasn't agreed the detail yet.  

However, others have pointed out that the timing could be more politically led. 

“While earlier introduction would be unwelcome, the change appears to have been timed to maximise revenue in 2029/30 – the year that counts for the Chancellor’s fiscal rule. £1.6bn of revenue in that year is a temporary gain which will be returned to taxpayers who pay employee contributions instead and claim back part of their tax relief," Robbins said.

But the message to savers in the meantime is clear: do not be deterred from pensions.

Natwest Cushon director of policy and research, Steve Watson, stressed that "salary sacrifice will still be an effective and very worthwhile tactic for employees and employers despite the introduction of the £2,000 contributions cap". 

This was echoed by People's Partnership chief executive officer, Patrick Heath-Lay, who emphasised that "even with salary sacrifice capped at £2,000 from 2029, pensions remain strongly tax advantaged". 

"We would urge pension savers not to mistake this change for a fundamental overhaul of the pension tax system: these changes should not dent confidence in pension saving," he stated. 

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