Reforms to salary sacrifice arrangements have edged closer to becoming law. During last year’s Budget, Chancellor Rachel Reeves revealed that savers will be required to pay National Insurance to HMRC if they enhance their pension funds through salary sacrifice by more than £2,000 annually.

Earlier this month, peers voted to increase this limit to a more generous £5,000, delivering a blow to the Government. However, amendments made to the National Insurance Contributions (Employer Pensions Contributions) Bill in the Lords could be overturned by MPs in the Commons, as part of parliamentary negotiations to settle on the final text known as “ping-pong”.

The Bill passed through the upper chamber at third reading on Thursday. Employers can provide salary sacrifice as part of their pension scheme as a tax-efficient method to help employees strengthen their retirement savings.

The reforms are scheduled to come into force in April 2029.

“The cost of pension salary sacrifice was set to travel to £8 billion a year by the end of this decade,” Treasury minister Lord Livermore said. “That increase has been driven mostly by high earners, with additional rate taxpayers tripling their salary sacrifice contributions since 2017.

“This includes individuals sacrificing their bonuses without paying any income tax and national insurance contributions on them. The status quo is neither fair nor is it fiscally sustainable.”

The minister added: “This Bill therefore introduces a cap of £2,000 under which no employer or employee contributions will be charged on any pension contributions.”

He continued: “The majority of those currently using salary sacrifice will be unaffected.”

Conservative shadow Treasury minister Baroness Neville-Rolfe criticised the Bill, stating it “prioritises the hope of short-term tax gain over the far more important task of sustaining a system that encourages and rewards responsible pension saving”.