Chancellor Rachel Reeves’ decision in the autumn Budget to impose a £2,000 annual cap on salary sacrifice has sparked concern among higher earners who rely on the mechanism to boost pension savings.
Lisa Picardo, chief business officer UK at PensionBee, said: “Salary sacrifice has long been an important planning tool for those in the workplace navigating tapering thresholds, reclaiming personal allowances when they hit earnings cliff-edges, or simply trying to build larger pension pots in a tax-efficient and disciplined way.
“The cap serves as a disincentive for employers to offer this facility, adding significant friction to this kind of planning.”
However, while the cap will limit National Insurance (NI) savings on contributions above that threshold, experts stress that there are still ways to be tax-efficient when saving for retirement.
One of the most notable options is to utilise a self-invested personal pension (SIPP) – a type of UK pension scheme that offers some tax relief and allows individuals to manage their own retirement savings.
Zohaib Mir, financing planner at EQ Investors, said: “The £2,000 NI cap only applies to salary sacrifice. Personal SIPP contributions are paid from income that has already had NI deducted, as they always have, so this rule doesn’t directly affect SIPP tax relief.”
But the question is whether it is best to move away from salary sacrifice – mostly done through auto-enrolment workplace pensions – and focus on growing your SIPP, to keep things as they are and take the NI hit or utilise both vehicles.
What does a SIPP have to offer?
When paying into a SIPP, the government adds tax relief at your marginal income tax rate up to the £60,000 annual allowance or 100% of your earnings – whichever is lower.
Investments held within a SIPP can also grow free from income and capital gains tax while dividends and gains remain inside the wrapper.
While most workplace pensions typically offer a sensible default fund and range of alternative funds designed to be simple and low-cost for members, a SIPP gives investors a broader menu of investment vehicles, including global funds, exchange-traded funds, investment trusts and more specialist or sustainable strategies.
As such, utilising a SIPP can help savers diversify more widely outside a UK-biased default fund and also align investments more closely with their own risk appetite or values.
“That extra choice is helpful for engaged investors, but it also brings more responsibility,” Mir said. “It’s easier to take on more risk than you realise, or to over-trade.”
What are your options?
Mir said there are three possible options for savers looking to build their pension pots and the right choice is dependent on earnings, employer terms and how much someone is contributing to their workplace pension.
The first option is to stop using salary sacrifice and pay into a SIPP instead. While this will give the saver more control and a wider investment choice, it does mean they will lose NI savings on the first £2,000 of salary sacrifice and any extra employer benefit tied to it.
Mir said this option is logical only for those who have already secured all available employer contributions and value the flexibility and control of a SIPP more than the NI saving.
Rachel Vahey, head of public policy at AJ Bell, added: “Most savers may want to continue paying into their workplace pension and take advantage of the employers’ pensions contributions on offer.”
This is because the employers’ pension contributions are effectively ‘free money’ and can make a big difference to someone’s final income in later life, Vahey said.
The next option would be to carry on as normal via salary sacrifice as this will still get income tax relief, although pension contributions above £2,000 will no longer get NI relief.
“For many people, the extra NI cost will be relatively modest and keeping things simple may be attractive,” Mir said.
“This can be reasonable where contributions aren’t far above £2,000 a year, or where the admin and complexity of changing arrangements outweighs the benefit.”
At the very least, savers should consider “maximising” what they can put aside via salary sacrifice ahead of the rule change taking effect in April 2029, Picardo noted.
The third option is a blend between the two, with savers using salary sacrifice up to the £2,000 cap and then topping up their pension savings beyond that via a SIPP.
“In practice, this is likely to be the default approach for a lot of higher or mid-earners,” Mir said.
“It provides a good balance where you can keep the available NI benefit, retain valuable employer funding and still have the option to use a SIPP for extra flexibility.”
Of all three options, Mir said this latter option is the “most broadly credible starting point”.
A “blended approach” of saving into an active workplace pension and a personal pension will work well for the majority of savers, Picardo agreed.
“Enjoying the benefits of employer contributions and salary sacrifice where possible through the workplace and channelling additional pension contributions into a personal pension to utilise the annual allowance, maintain tax efficiency, investment flexibility and pension engagement gives the best of both worlds,” she said.
The right mix will be highly personal to the individual but experts emphasised that pensions should not exist in a vacuum, encouraging savers to also consider other saving vehicles, such as ISAs, general investment accounts, higher-risk tax-advantaged investments such as VCTs and overpaying mortgages or other debt.
“For many people, the right answer will be a blend of pensions, ISAs and paying down debt rather than using just one wrapper,” Mir said.