£4.7bn "salary sacrifice raid" will mean the pension benefit is dumped by thousands of employers

CAPPING salary sacrifice at £2,000 a year could spell the death knell for the popular pension contribution scheme and may force some small businesses to cut jobs.

The scheme encourages employees to pay more into their pension, at the same time helping employers save on National Insurance.

Anita Wright, chartered financial planner at Ribble Wealth Management said: “The so called “pension salary sacrifice raid” is expected to raise a further £4.7 billion by limiting the National Insurance advantages that workers and employers have, up to now, legitimately enjoyed when funding pensions via salary sacrifice.”

Simon Thomas, managing director and chartered accountant at Ridgefield Consulting argued that salary sacrifice has been a legitimate and effective way to boost retirement savings while helping employers reward staff in a tax-efficient manner.

He said: “These schemes don’t just benefit employees saving for retirement; they are also vital to employers. For many growing businesses and start-ups that cannot yet compete on headline salaries, enhanced pension contributions through salary sacrifice form a crucial part of how they attract and retain talent.”

"The £2,000 has reduced the tax efficiency and will make these schemes far less attractive and could lead many businesses to scrap them entirely. Combined with the recent rise in employer National Insurance, this could place additional pressure on businesses already managing tight margins and may ultimately weaken their ability to recruit competitively.”"

Kate Underwood, founder and chief people strategist at Southampton-based Kate Underwood HR and Training said the move would hit small businesses.

"For a lot of us, pension salary sacrifice has been one of the only ways to keep the numbers vaguely sensible. Wages are up, business rates are up, energy has been a nightmare, and now employers will pay more National Insurance on anything over the cap. 

"That “little tweak” is yet another extra cost dumped on top. Most small businesses will not start sacking people because of this one change, but they will think twice before hiring. 

"You will see more pauses on recruitment, slower replacement of leavers and fewer hours or perks being offered. It also makes it harder to attract experienced people, because you have just lost one of the few tools you had to put together a decent package without blowing the budget. On its own, it is not a crisis. Added to everything else, it really stings."

Philly Ponniah, chartered wealth manager and financial coach at Philly Financial, said many rely on salary sacrifice.

She added: "Capping the amount of salary savers can sacrifice into their pension at £2,000 a year is a big shift. 

"It’s set to raise billions, which shows how many workers currently rely on this system. Salary sacrifice has been one of the simplest, safest ways for people to boost retirement savings and reduce their tax bill. Taking that relief away after £2,000 means higher National Insurance for both workers and employers. 

"For many people, that’s a real drop in take-home pay at a time when budgets are already tight. It won’t stop pension saving, but it does make it more expensive, especially for middle earners who use sacrifice to plan ahead. In the long run, it risks weakening one of the few tools that helps people save consistently for later life."

David Stirling, independent financial adviser at Belfast-based Mint Wealth Ltd, said this will hit savers.

He continued: “This policy may look clever on paper to the Chancellor, but in practice higher earners stand to lose the biggest perk of their pension planning, employers may scale back contributions, and long-term retirement pots could shrink by tens of thousands. 

"All in the name of ‘fairness’, leaving some savers to wonder if planning for a comfortable retirement has just become a bureaucratic minefield. Meanwhile, employers may have to rethink their generosity and savers face smaller pots, while the Treasury happily pockets billions in extra National Insurance."