More than three million UK workers could see their retirement savings take a significant hit after the changes were announced at the end of November. In her second Budget, Rachel Reeves revealed new plans to limit tax-free salary sacrifice pension contributions to £2,000 per year. The details were actually revealed in an Office for Budget Responsibility (OBR) document that was mistakenly published before her speech.

According to new government analysis, around 3.3 million people will be affected by a new National Insurance rule targeting pension contributions. From April 2029, the amount exempt from National Insurance contributions will be capped at £2,000 a year for employee contributions made via salary sacrifice. Salary sacrifice is an arrangement where you give up part of your salary or bonus, and your employer contributes the equivalent amount directly into your pension.

Any contributions above this threshold will be subject to National Insurance with 8% on earnings below £50,268 and 2% on income above that.

The government’s impact assessment estimates that 7.7 million employees currently use salary sacrifice arrangements. Of these, around 3.3 million contribute more than £2,000 annually and will therefore be affected by the new rules. The remaining 4.3 million employees contribute below the cap and will not face any additional charges.

Employees who use salary sacrifice tend to be of “typical working age,” with roughly half between 31 and 50 years old. Men make up more than 59% of contributions.

The Government expects the tax increase to generate £4.8 billion in the first year and £2.6 billion in 2030/31.

However, not everyone supports the pension contribution cap, with some critics warning it could discourage saving and place an unnecessary burden on both employees and employers.

Former Liberal Democrats Pensions Minister Sir Steve Webb and partner at pension consultants LCP, said: “A budget measure that was largely seen as complex and technical could have significant real-world implications for millions of workers.

“At a time when the nation as a whole has a significant ‘under-saving’ problem, this change will make matters worse.”

Steve Hitchiner, who chairs the Tax Group at the Society of Pensions Professionals, also said: “Abolishing salary sacrifice for pensions will affect the take-home pay of millions of employees – especially basic rate taxpayers – and is a tax on working people, in spirit if not in name. It is also another sizeable cost to employers and, perhaps most importantly, its removal will reduce pension saving.”

The chancellor told the Commons that the cost of salary sacrifice for pensions is projected to nearly triple, rising from £2.8 billion in 2017 to £8 billion by 2030.

She said the “greatest benefit” was going to “higher earners or to those in the financial services sector putting their bonuses into pensions tax-free, while those on the minimum wage or whose employers don’t offer salary sacrifice don’t benefit at all”.

Rachel Reeves said:”This is not sustainable for the public finances, putting pressure on the tax everyone else pays, and so I am introducing a £2,000 cap on salary sacrifice into a pension with contributions above that taxed in the same way as other employee pension contributions.”

The chancellor added: “That is a pragmatic step so that people, especially on low and middle incomes, can continue to use salary sacrifice for their pension without paying any more tax than they do now. And to give individuals and employers time to adjust to these new arrangements, these changes will come into effect in 2029.”