The government faces pressure to rethink plans to curb salary sacrifice pension contributions after the House of Lords backed a series of amendments that significantly soften the proposed legislation.
Peers in the House of Lords have voted to raise the government’s proposed cap on salary sacrifice pension contributions to £5,000, more than doubling the initial £2,000 limit set out in draft legislation.
The amendment, tabled by Liberal Democrat peer Baroness Susan Kramer, was approved by 194 votes to 140 as part of the National Insurance Contributions (Employer Pensions Contributions) Bill, which is currently progressing through parliament.
Under the government’s original proposal, salary sacrifice pension contributions above £2,000 a year would become subject to National Insurance contributions. The revised £5,000 limit aims to reduce the number of workers affected by the change.
The legislation is not expected to come into force until 2029, but ministers have sought to accelerate the Bill’s passage through parliament.
Speaking in the Lords last week, Kramer said increasing the cap would help protect pension saving behaviour, particularly among younger and lower-paid workers.
Former pensions minister Baroness Ros Altmann also supported the higher cap, arguing the £5,000 threshold would be less likely to affect basic-rate taxpayers.
Altmann said the government had acknowledged that under the original proposals around a quarter of basic-rate taxpayers using salary sacrifice for pension contributions could be affected.
The £5,000 cap was one of several amendments to the Bill passed by peers. Others include measures to restrict the policy to higher-rate taxpayers, exempt charities and small and medium-sized enterprises from the cap, and ensure student loan repayments are not negatively affected.
Separately, the government confirmed during the report stage that the proposed £2,000 limit would apply to each job an employee holds within a tax year. This means someone with three part-time roles could contribute up to £6,000 annually under salary sacrifice if the £2,000 cap remains. Similarly, employees changing jobs within a tax year could access the full allowance at each employer.
Altmann said this highlighted further practical difficulties with the policy as currently envisaged. She argued that requiring employers to track employees’ pension contributions across multiple jobs could raise privacy concerns and would be “pretty well impossible” to implement.
She added: “This Bill should all be put on hold until the Government realises what it is doing. It simply does not seem to understand the costs that would be imposed on employers and the damage to workers’ pensions that capping salary sacrificed pension contributions will cause.
“Pension administration is complex enough and these changes will create further complexity. The costs of adjusting payroll systems, changing contracts of employment and revising pension scheme information will make employer cost burdens worse too.”
Barnett Waddingham head of DC pensions Mark Futcher says: “The tabled amendment to increase the proposed salary sacrifice cap to £5,000 – if it ultimately remains in place – is a welcome step in recognising the vital role salary sacrifice can play in helping people build their pension savings. For many younger workers and lower earners, salary sacrifice is a straightforward way to boost contributions early in their careers, when even small amounts invested can have the biggest impact over time.
“That said, introducing a cap at any level still risks adding unnecessary complexity for employers and confusion for savers. Our research shows that nearly two thirds of employees weren’t even aware a restriction was planned, despite more than half already using salary sacrifice today. With many employers also seeing the system as complicated to operate, policymakers should ask whether the additional administrative burden of a cap and the uncertainty it creates is really worthwhile.
“Salary sacrifice has been an effective mechanism for encouraging retirement saving while helping employers manage costs. A good system should make pension saving accessible to all – including smaller businesses and their workers – but also be simple enough for employers to run and employees to understand. Policies that support employers in maintaining strong pension provision ultimately benefit employees and the wider economy too.”
