A proposed cap on salary sacrifice pension schemes could raise taxes for millions of private sector workers while sparing the public sector, in what appears to be a “convenient” Budget move for Rachel Reeves. After months of speculation that pension tax-free cash could be cut in the Autumn Budget on November 26, Treasury briefings now suggest that a cap on ‘salary sacrifice’ is “emerging as the most likely way” for the Chancellor to raise money from pension tax benefits.

However, the move would have an “immediate effect” on the take-home pay of those opting into the scheme. Gary Smith, senior partner and retirement specialist at Evelyn Partners, said: “If these briefings have substance, it is a strategy that makes total political sense for the Chancellor. On the one hand, raiding tax-free cash would have alienated millions in retirement and pre-retirement, as well as powerful public sector bodies trying to protect the benefits of their members’ gold-plated final salary pensions.”

He said: “On the other, a salary sacrifice crackdown will not only swerve a public sector backlash – as the system is not generally used in those schemes – but also it will not affect those already retired. Even among those who are still saving into pensions in the private sector, it will not be widely understood or feared, because the effects are somewhat obscure.”

Salary sacrifice allows employees to exchange part of their gross salary for an equivalent employer pension contribution.

Because these contributions are not currently subject to National Insurance (NI), the scheme boosts take-home pay and increases pension savings at no extra cost, making it a highly tax-efficient way to save for retirement.

Rumours suggest Chancellor Rachel Reeves has plans to cap the amount that can be saved through salary sacrifice without paying NI. Under the proposal, employees would pay the full NI rate on any pension contributions made via salary sacrifice above £2,000 a year. The measure is expected to raise around £2 billion.

However, Mr Smith warned that the policy would hit pay packets hard.

He said: “This could really damage not just pension pots but also pay rises, bonus awards, and businesses’ hiring incentives. It would, in effect, be a stealth tax on remuneration.”

To illustrate the potential loss of savings, an analysis by AJ Bell revealed that someone aged 35, earning £50,000 per year, could face a £22,060 shortfall in their pension by age 65 under these plans.

This assumes they already have a pension fund of £30,000 and save an overall contribution of 5% personally, with an additional 3% contribution from their employer.

The black hole rises to over £37,000 or even nearly £50,000 if they are already a higher earner on £75,000 or £100,000 respectively.

Mr Smith said: “Many employers will limit their pension contributions to the minimum or apply a 15% reduction to account for the employer’s National Insurance.”

He added that while investors should not panic, time is limited. He said: “We always advise our clients to look beyond policy speculation – as was the case with tax-free cash – and there is not a massive amount that people can do about a mooted salary sacrifice clampdown.

“One option… might be to ramp up pension contributions for the rest of the 2025/26 tax year to take full advantage of the benefits currently on offer.”

Depending on how firms react, Mr Smith said the “immediate effect” might be a National Insurance increase for those white-collar workers who don’t change the percentage of salary paid into their pension each month after the £2,000 cap comes in.

He said: “They will just see their monthly salary payment go down, and their NI bill go up if they study their payslip.”

He said that employees could react quickly, adding that it could likely mean some people would reduce their pension contributions to recoup the lost disposable income.

Research suggests that about 48% of UK private companies offer salary sacrifice pension systems, rising to 67% at larger firms and up to 85% among the biggest employers.

Mr Smith said: “In the wider sense of trying to encourage private pension saving, it is a pretty disastrous step in the wrong direction, as it will discourage those who are currently ‘doing the right thing’ by building up their private pension savings.”

He warned that it would also hit employers. He said: “This is also another hit on employers as they will end up paying more National Insurance on the excess over the £2,000 limit. After the steep increases in employer National Insurance at the last Budget, this will be another hefty blow to employers and could well drive down pay rises, bonus pools and hiring at larger firms.”

The public sector, however, is likely to escape untouched.

Mr Smith said: “Public sector schemes do not generally operate on a salary sacrifice basis, and neither do many occupational money purchase schemes. The public sector schemes are ‘net pay arrangements’, which means that the employee’s gross pension contribution is deducted from earnings before income tax is calculated.”

He said: “A cap on employee salary sacrifice for pension contributions should therefore have little impact on public sector pensions schemes, including all of the civil service and Government-backed schemes, which is very convenient for the Chancellor.”