Pension ‘cap’ date set as ‘850,000 workers affected’ | Personal Finance | Finance

The Conservatives have warned that a new limit on pension salary sacrifice exempt from national insurance will “whack the lower paid harder”, as the legislation passed through the Commons. The National Insurance Contributions (Employer Pensions Contributions) Bill secured its third reading by 316 votes to 194, a majority of 122.

Under the Bill, salary sacrifice pension contributions exceeding an annual £2,000 threshold will lose their national insurance exemption from April 2029 onwards. Treasury minister Torsten Bell described these changes as “inevitable”, noting that the cost of current arrangements is projected to triple between their 2017 introduction and the decade’s end.

He characterised the measures in the Bill, initially unveiled in November’s budget, as “pragmatic and balanced” and offered reassurance to savers that pension contributions remain “hugely tax advantageous”. However, the Conservatives have labelled it a “cynical measure” designed to generate savings during an election year.

Shadow treasury minister Mark Garnier criticised the timing of the change: “The change appears there have been timed to maximise revenue in 2029-30, the year that counts for the Chancellor’s fiscal rules. That is £4.8 billion to fill the Chancellor’s black hole, which she will have by then, in order to make a cynical attempt to stick to a fiscal rule, a cynical measure that destroys a lifetime of savings opportunities for just one year of revenue.”

The Tories have expressed worries that the proposed alterations will unfairly affect lower-paid workers and those with student loans, calling on the Government to exempt basic rate taxpayers from the £2,000 annual cap.

Mr Garnier said: “The change will disproportionately affect basic rate taxpayers, because they pay at 8% NIC on contributions over £2,000 caps compared to the 2% start of higher earners.”

He also emphasised the strain on those with student loans, noting: “But it will also disproportionately impact those with student loans who earn above the repayment threshold, as they will have incurred an extra 9% student loan deduction from their pay.”

Mr Garnier also said: “So, at a time when we are trying to get people to do the right thing, to save for the future, the Government, it seems, wants to whack them hard. They want to whack the lower-paid harder.”

He added: “And they want to whack also a younger generation even harder than those who enjoyed free university education.”

Addressing the difficulties faced by the younger generation, he said: “And for this younger generation, they can’t afford to buy a house, they have to pay for university education, the Government has made it far harder to get a job with their jobs tax and at the time when we are desperately trying to get people to save for their retirement, they make it harder to save for a pension.”

Mr Garnier told MPs that roughly 850,000 basic rate taxpayers who use pension salary sacrifice will be impacted by this cap. In turn, Mr Bell sought to reassure MPs that 95 per cent of those earning under £30,000 would be unaffected by the alterations, emphasising that its introduction in 2029 provides workers, employers and pension providers “plenty of time to prepare”.

He went on to clarify that those under-saving for retirement, including the self-employed and lower earners, are “precluded from using salary sacrifice” or are “much less likely to use it than other groups”.

The minister told the House that the reforms within the Bill are “badly needed” to cut borrowing costs and energy bills, adding: “If we just defend tax reliefs that are hard to justify and whose costs are rising significantly, that does mean higher taxes for everybody else and that is not something that we are prepared to see happen.”

A Conservative amendment attempting to exempt basic rate taxpayers from the £2,000 annual cap on pension salary sacrifice that is free from national insurance was rejected by MPs, with 326 voting against and 191 in favour – a majority of 135. The Liberal Democrats, meanwhile, called on the Government to calculate and publish the projected lifetime value of an individual’s pension both before and after the Bill’s changes take effect.

Mr Bell highlighted that the Government has released a tax information impact note alongside the Bill’s introduction, detailing the policy’s effect on the Exchequer, the economy, individuals and businesses. He further noted that the Office for Budget Responsibility “do not expect any material impact on savings as a result of the Budget 2025 changes”.

The proposed amendment by the Liberal Democrats was rejected by MPs, with 317 voting against and 195 in favour – a majority of 122. The Bill will now advance to the House of Lords for review, although it is anticipated to be categorised as a money Bill, which would prevent the upper house from blocking or modifying it.