Headlines and hype
Some UK media outlets have published dramatic headlines such as:
“Millions face lower pensions after salary sacrifice changes”
These headlines strongly imply:
- Pension tax benefits have been cut
- Saver outcomes will be substantially reduced
- Pensions are becoming less worthwhile
This narrative is misleading.
The reality is far more stable and reassuring.
Income tax relief, the biggest incentive in pensions, has not changed.
There has been one change - and it is limited in scope.
Before we talk about headlines, it’s important to understand how pension contributions are actually taken from your pay. Because this is where a lot of confusion, and misleading reporting, comes from.
There are three main ways your pension contributions can be made from your salary:
-
1 Step 1
Salary Sacrifice (or “Salary Exchange”)
This is where you agree to reduce your salary by the amount you want to pay into your pension.
Instead of paying that amount as earnings, your employer pays it directly into your pension.
- Full income tax relief (20%, 40% or 45%)
- Employee AND employer save National Insurance (NI) – this is what is changing in 2029, but at least on the first £2,000 per year going forward
- This method can be tax-efficient for many employees, depending on their circumstances
- Employer may boost contribution using their NI savings
From April 2029: only the first £2,000 a year gets the NI saving — everything else stays tax-efficient.
-
2 Step 2
Net Pay Arrangement
Your contribution is deducted from your gross salary before income tax is worked out.
- Full income tax relief applied automatically
- Nothing to claim back from HMRC
- No NI savings, you still pay National Insurance on full salary
No changes have been made to this method.
This is commonly used in workplace pension schemes
-
3 Step 3
Relief at Source
You pay contributions from your take-home (after-tax) pay.
Your pension provider then automatically claims 20% basic rate tax relief from HMRC and adds it into your pension.
- 20% tax relief added automatically
- Higher/Additional rate taxpayers can claim extra relief through tax returns
- No National Insurance saving
This method is also completely unaffected by the recent Budget changes.
Common with personal pensions like SIPPs and some contract-based workplace schemes.
Why It Matters
- The headlines you’ve seen only relate to ONE type of contribution, salary sacrifice, and only the NI element above the first £2,000.
- If you’re using Net Pay or Relief at Source, nothing changes at all.
- If you use Salary Sacrifice, the main tax relief benefit is still fully intact.
So what actually changed in the budget?
From April 2029:
- Only the first £2,000 of salary sacrifice into pensions per employee per year will be exempt from National Insurance
- Contributions above that amount will face employee & employer NI (like normal earnings)
That’s it.
What has NOT changed:
- Income tax relief on contributions
- Tax-free investment growth inside pensions
- Annual Allowance rules
- Workplace pension structure
- Employer contributions
- Death benefit structure
- Auto-enrolment incentives
Most pension savers won’t notice any meaningful difference.
Why salary sacrifice still works
Even after 2029:
- Full income tax relief continues
- You reduce income for tax purposes
- Employer may still enhance contributions using their NI savings
- NIC is still saved on the first £2,000 per year
- Investment return multiplies over the long term
Example - Basic Rate Taxpayer
Annual pension via salary sacrifice: £3,000
| Element | Impact |
|---|---|
| Income tax relief (20%) | £600 saved |
| Employee NI relief (12% on first £2k) | £240 saved |
| Net personal cost | £2,160 for £3,000 invested |
You get £840 free every year.
This type of return is unlikely to be found through banks or any other products.
Why headlines are especially wrong for higher earners
If adjusted income is £100,000+, personal allowance (the amount of income you can earn without paying any tax each year) starts to taper away. Pension contributions can:
- Restore the personal allowance
- Reduce exposure to 40% or 45% tax
- Increase child benefit eligibility in some cases
- Preserve tax-efficient employer benefits
For a higher earner this could save an astonishing £16,000 a year through restoring the personal allowance and through tax relief. Far greater than any NI impact.
This remains entirely unchanged.
The long-term numbers still favour pensions
Tax relief is the adrenaline shot. Compound growth is the heartbeat.
Long-Term Example
£4,000/year contribution
30 years
Growth 5% a year (net)
| Without Tax Relief | With Tax Relief (20%) | With Higher Rate Tax Relief (40%) |
|---|---|---|
| You pay: £4,000 x 30 = £120,000 | You pay: £96,000 | You pay: £72,000 |
| Pot value: £277,000 | Pot value: £277,000 | Pot value: £344,000 |
| Gain vs ISA/cash: | £67,000 more | £125,000 |
Even with the NI tweak pensions can be one of the most tax-efficient long-term saving structures for many UK savers.
A closer look: How much will the change cost?
Let’s examine someone who:
Earns £85,000
Pays £6,000/year via salary sacrifice
30 years until retirement
| Component | Value |
|---|---|
| Income tax relief gained | £72,000 |
| NI relief on first £2k | £7,800 |
| NI lost due to cap | £14,400 |
| Net benefit retained | £65,400 over lifetime |
| Final pot value (5% growth) | £562,000 |
Even after the rule change: In this illustrative example, the modelled tax treatment results in a materially higher net benefit. Actual outcomes will vary as of course invested money can go down as well as up you may wish to seek regulated financial advice to assess whether these options are appropriate for your circumstances.
Why the sensationalism is so dangerous
Headlines that make people panic:
- Reduce pension contributions
- Switch into less-efficient savings
- Delay saving (the worst impact on compound growth)
And that leads to:
- Bigger reliance on State Pension
- Lower living standards in retirement
- Greater pressure on future governments
The biggest risk is not the policy change. The biggest risk is people reacting wrongly to headlines.
Guidance for savers
Do this:
- Stay committed to pension saving
- Review your method if using salary sacrifice above £2k/year
- Take advantage of income tax relief
- Seek personalised advice
Do NOT:
- Stop contributing based on newspaper headlines
- Assume pensions have become less valuable
- Miss employer contributions (free money)
At Pension Pulse, we:
- Explain your options clearly
- Maximise tax efficiencies
- Tailor planning around your life, income and goals
- Keep you informed of regulatory changes
- Ensure your pension is set up correctly and efficiently
Confusion leads to bad outcomes. Advice leads to confidence.
IMPORTANT INFORMATION
Pension Pulse Ltd is authorised and regulated by the Financial Conduct Authority (FRN 1029743). Registered Office: Koba, 100 Barbirolli Square, Manchester.
This article is for information only and does not constitute personal financial advice. Past performance is not a reliable indicator of future results.
The value of investments can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and UK legislation, which may change.
If you are unsure whether a product or investment is right for you, please seek regulated financial advice.
