New path to pension funding

The Treasury estimates that around 7.7 million people currently use salary sacrifice for pensions, making the changes to the rules a potential concern for about 20 per cent of employed adults.

Antonia Medlicott, founder and managing director of finance education specialists Investing Insiders, has these tips for anyone confused by what it means and worried about what to do:

1 Don’t throw the baby out with the bathwater.

There are several reasons not to abandon salary sacrifice, at least for the time being.

Firstly, around 75 per cent of people who use salary sacrifice won’t be affected by this cap. It’s targeted at high earners, so if for example, you earn the average UK salary of £37,000, you could put up to 5 per cent of that into your pension every year through salary sacrifice, and not be affected, as that still puts you below the £2,000 total mark.

Secondly, the cap isn’t a cap on contributions, just on how much can be contributed without needing to pay NICs.

And, lastly, this new rule won’t come into effect until April 2029, so there’s no reason not to make the most of the scheme before then. The maximum you can put in each year (across all types of pensions) is £60,000, or 100 per cent of your UK earnings, whichever is lower. It can even be higher if you haven’t made full use of your allowance in the previous three years.”

2 A workplace pension is still a very smart way to save for retirement.

There is nothing changing in the treatment of the contributions made through personal pensions, or workplace pensions after tax has already been taken from your payslip. Salary sacrifice is a different scheme which some employers offer, and which employees can sign-up to if they choose.

For personal (private) pensions and workplace contributions that aren’t part of a salary sacrifice scheme, nothing is changing. So you’ll still get full income-tax relief. While you won’t get National Insurance relief outside of a salary sacrifice scheme, workplace pensions continue to be a beneficial way to save for retirement, as your employer is also helping to fund your retirement.

3 If you use salary sacrifice to lower your taxable income, look at options that aren’t being capped.

Many people use salary sacrifice to reduce their taxable income, avoiding painful cliff edges like the loss of Child Benefit at £60,000, and the loss of their tax-free Personal Allowance at £100,000.

If pension contributions have been the main strategy you’ve been using to achieve this, you may have to look at other ways to reduce your taxable income once the new £2,000 cap comes into effect.

But certain schemes continue to be exempt from income tax and NICs altogether, while some salary sacrifice arrangements are taxed as a “benefit in kind”, so the National Insurance exemption is irrelevant anyway.

The following schemes will remain exempt from both National Insurance and income tax as far as we know: Workplace nursery schemes; subsidised canteen meals; Cycle to Work; and employer-provided childcare vouchers (although these can only be accessed by existing members).

Electric vehicle (EV) schemes could also be an option. EVs are a “benefit in kind”, meaning that they must be taxed – but the government has set the rate deliberately low.

Finally, Antonia added: “There are more than three years until this change comes into effect. Planning now could mean you don’t lose out later on.”

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