A £2,000 yearly cap will be put on salary sacrifice pension contributions from April 2029, Chancellor Rachel Reeves announced in the Autumn Budget.

As a result, any contributions above this amount will be liable to National Insurance (NI) and will be treated as ordinary employee and employer pension contributions.

The Office for Budget Responsibility (OBR) has estimated that this cap is set to raise £4.7bn in the 2029/30 financial year, and £2.6bn in the 2030/31 financial year.

It comes after employee NI contributions were increased to 15% last year.

AJ Bell said that the move means Labour has neatly avoided breaking its manifesto pledge not to raise taxes on working people.

However, the investment platform added that many people will see less in their pay packets, with the biggest impact landing on those in the £45,000 to £50,000 band.

Senior pensions and savings expert at AJ Bell, Charlene Young, stated: "Employers using the schemes will be forced to foot a second consecutive tax raising Budget. While salary sacrifice currently helps workers save up to 8% employee NI on the cost of their pension contributions, the savings on offer are bigger for employers.

"There is no upper threshold for employer NI, so they will face a 15% charge on the full value of sacrificed contributions over the £2,000 cap. Some generous employers have previously rewarded employees by sharing all or some of their saving, but it’s likely the added costs to payroll will lead to reward schemes being watered down or withdrawn."

Head of retirement analysis at Hargreaves Lansdown, Helen Morrissey, said that salary sacrifice schemes enable workers to get the full value of every pound through tax and NI savings.

As a result, she stated that the new measures will "act as a disincentive" to those on higher incomes.

She added: "At a time when there is such a focus on pension adequacy it seems counter intuitive to put barriers in the way to boosting contributions.

"With the changes not due to come in until April 2029 there’s still time to take advantage of the system as it currently stands to make contributions to your pension under salary sacrifice and take advantage of the NI savings."

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