Experts have urged Chancellor Rachel Reeves to U-turn on capping National Insurance relief for pension contributions at £2,000 a year, with one criticising it as “a blunt tax grab dressed up as fairness”. The House of Lords is currently scrutinising legislation that would impose a £2,000 annual cap on National Insurance relief for pension contributions made via salary sacrifice.

This could strip tens of thousands of pounds from individual retirement pots over time. But the House of Lords has submitted amendments to raise the government’s proposed cap on salary sacrifice pension contributions to £5,000.

The amended bill will return to the House of Commons next week. Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, said capping the relief at £2,000 would come “at the expense of long-term retirement adequacy”.

She added: “Capping National Insurance relief on salary sacrifice pensions at £2,000 annually risks sending entirely the wrong message. For years, governments have encouraged people to save more for retirement to reduce long-term reliance on the state. Introducing a cap like this effectively penalises disciplined savers and employers who structured remuneration responsibly.

“Over time, this could remove tens of thousands of pounds from retirement pots through lost compounding and that’s before you consider the behavioural impact. If incentives weaken, participation drops. Employers may scale back salary sacrifice schemes altogether, increasing payroll costs and reducing pension engagement.

“If the objective is short-term revenue, it may come at the expense of long-term retirement adequacy. The Government should think carefully before undermining one of the most effective workplace savings mechanisms we have.”

Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said the move by the government would be a mistake.

He added: “It’s in everyone’s interests for people to contribute to a pension to create a healthy savings culture and reduce the burden on the state in years to come. The constant tinkering and faffing with rules, risks putting people off so is counter-productive.

“We may see companies be inventive with their pay deals to structure things in a way that avoids this tax hike, and so it might not even raise the money the government thinks it will. Hopefully the government thinks again.”

Kate Underwood, founder of Southampton-based Kate Underwood HR and Training, called it a “blunt tax grab”.

She added: “Reeves should U-turn. Capping National Insurance (NI) relief at £2,000 is a blunt tax grab dressed up as ‘fairness’. Salary sacrifice is one of the few simple, legal ways normal workers and employers boost pensions. This cap basically says: save more, and we’ll charge you more NI for the privilege. Brilliant message if you want people to understand to save and rely on the state later. And it is not just ‘high earners’.

“Plenty of small businesses use salary sacrifice as the grown-up way to fund decent pensions without constant pay battles. Whack extra NI on top and guess what happens. Employers scale back. Schemes get binned. Staff take home less. Trust drops. If the government wants revenue, fine.

“Do it openly, not by quietly punishing pension saving. My advice to employers: if you are changing pension arrangements, consult properly and explain it in plain English, or you will buy yourself a morale problem.”

Rohit Parmar-Mistry, Founder at Burton-on-Trent-based Pattrn Data, said it would punish savers.

He added: “Capping NI relief on pension salary sacrifice at £2,000 sounds like a tidy fairness fix, but it is a blunt instrument that will quietly punish exactly the people we should be nudging into long-term saving. Salary sacrifice is one of the few mechanisms that makes pensions feel immediate: higher take-home now, bigger pot later.

“If the policy goal is to stop a minority of high earners extracting outsized NI advantages, target that minority. A hard cap risks dragging in mid-career savers who are finally contributing properly, while adding messy employer admin. In practice, employers will respond by redesigning schemes.

“My view: pause and redesign. Use a tapered approach, publish clear rules up front, and protect genuine retirement savings. Otherwise this becomes a stealth tax plus a savings disincentive, dressed up as reform.”

Announcing the move at the Budget in November, Reeves said that currently 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”.

She added: “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.

“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.”