Use this loophole to boost your pension by £10k before it’s too late

Pension savers have less than three years left to take full advantage of a popular tax perk that could turbocharge their retirement nest egg by tens of thousands of pounds before the Chancellor caps the valuable loophole.

Rachel Reeves is cracking down on the amount workers can pay into their pensions via popular ‘salary sacrifice’ schemes, in a £4.7billion pensions raid that could leave 2.9million of us with less money in retirement, new data revealed on Monday.

The scheme allows workers to forego wages in return for the money being paid directly into their retirement fund, reducing the amount of National Insurance (NI) paid by both workers and their employers.

Last November, the Chancellor announced during the Autumn Budget that contributions made via these schemes without incurring NI contributions will be capped at £2,000 a month from April 2029.

But anyone who has an employer that offers these schemes can still make full use of them by making uncapped contributions before it’s too late – and boost their pension by hundreds of thousands of pounds.

Here’s everything you need to know about what exactly is changing and how you can act today to safeguard your future retirement plans.

What is salary sacrifice and who will be affected?

Salary sacrifice is a scheme that companies can use to provide workplace benefits to their staff such as pension contributions, a company car or a bicycle for cycle-to-work schemes.

Employers allow staff to take a supposed ‘pay cut’, but the amount cut from their salary gets paid directly into their pension. This is beneficial because that money doesn’t currently attract any taxes – both the employee and the employer pay less NI as a result.

Last year the Chancellor announced that contributions made via salary sacrifice schemes without incurring NI contributions will be capped at £2,000 a month from April 2029

More than 2.8million workers are expected to cut back on pension saving once the new restrictions come into force

Paying a larger amount into your pension can also help to push you into a lower income tax bracket, whether you do it via salary sacrifice or not. This can be useful if you are near a tax cliff edge where the extra earnings would mean you are no longer eligible to receive a benefit such as child benefit or free hours of childcare, for example. Similarly, if you have a student loan, you may not pay back as much if you lower your taxable income.

There is currently no upper limit on the contributions you can make while saving on NI. But from April 2029 onwards, workers will only be able to pay up to £2,000 via these schemes with the tax perk.

Anything above this will be treated as ordinary employee pension contributions in the tax system and standard rates of NI will be charged at 8 pc on basic rate earnings of up to £50,270, and 2 pc above this for higher-rate taxpayers.

The Government’s pension raid is expected to raise £4.7billion in the first year after April 2029 and £2.6billion in the following year, it said at the time of the Budget.

More than 2.8million workers are expected to cut back on pension saving once the new restrictions come into force, according to official data requested by Sir Steve Webb, former pensions minister and now partner at pension consultant LCP.

Many companies, particularly larger ones, have offered salary sacrifice schemes to their employees because they are a mutually beneficial, perfectly legal NI dodge.

You might already have opted in and not realised, but check with your HR department, or the operations or office manager in a smaller firm, and find out if you can sign up.

One in three private sector employees currently save into their pensions via salary sacrifice.

Anyone earning £40,000 or more who saves the minimum 5 per cent into their workplace pension via salary sacrifice will be hit by the new National Insurance charge on pension savings.

However, those on lower incomes could also be hit if they make larger contributions to their pensions.

Act now before the window closes

There’s still time to fight back against Labour’s pension raid.

The new cap will come into effect in April 2029, which means you can still make use of the tax break. By increasing your pension contributions in the meantime, you could make tax savings that boost your pension by up to £68,000, calculations by financial services firm Quilter show.

For example, a 30-year-old earning £55,000 a year can boost their retirement pot by nearly £20,000 if they increase the amount they are contributing for the next three years to 15 pc of their salary, or £8,250 a year.

Pensions expert Steve Webb says there is a strong case for making the most of the NI now, while you still can

Over two years and nine months, they would save £3,379 in NI and, invested in a pension fund that grows at 5 pc a year, this would grow to £19,569 by state pension age (currently rising from 66 to 67).

Similarly, a 40-year-old earning £100,000 a year, who sacrifices 15 pc of their salary between now and 2029, will save £6,466 in NI over the period, boosting their future pension pot by £22,992.

Check to see how much you could save by making use of the loophole in the table below.

Sir Steve says: ‘From 2029 onwards, the advantages of salary sacrifice will be cut back significantly, especially for those making the largest contributions.

‘So there is a strong case for making the most of this NI break while you can.’

He says you could think about bringing forward contributions that you were planning to make in years to come so that more of them fall before April 2029 and get the full benefit of NI savings.

‘Those who receive bonuses should also consider if more of them can be diverted into pension saving under the current rules, as many bonuses will exceed the £2,000 cap once the new rules are introduced.’

Similarly, if you get a pay rise, you could ask your employer to increase the amount you contribute each year before you begin to notice the difference in income.

Adam Cole, retirement specialist at Quilter, says: ‘There is a clear incentive for employees to make the most of existing arrangements while they still can.

‘However, salary sacrifice is not always as flexible as people assume. In many cases it forms part of an employment contract, meaning contributions cannot easily be reduced once increased.

‘Before acting, individuals should check the small print and understand how much flexibility their employer allows.’ Rules vary depending on your employer.

Annual pension saving limits

Savers can pay up to £60,000 a year – or 100 pc of their annual earnings, whichever is the lowest – into their pension each year. This is known as the ‘annual allowance’ and includes your own and your employer’s contributions into a pension and tax relief itself.

The rules are more complicated for higher earners who have an adjusted income above £260,000 a year (this includes pension contributions). Above this, the annual allowance is tapered down by £1 for every £2 of adjusted income, down to £10,000.

If you exceed the annual allowance this is not illegal, but you will not get any tax relief on any excess pension contributions.

What to do beyond 2029

Saving into a pension is still one of the most powerful ways to build long-term financial security for yourself and that won’t change, points out Rachel Vahey, head of public policy at AJ Bell.

She says while the cap may reduce the NI savings available on sacrificed salary above £2,000 a year, you will still benefit from compulsory employer contributions – at minimum 3pc of salary between £6,240 and £50,270 under auto enrolment rules.

At present, people auto enrolled into work pensions save at minimum 8 per cent of that portion of their salary. Workers put in 4 per cent, employers 3 per cent, and the Government 1 per cent via tax relief.

Many employers are more generous and pay in above the 3 per cent minimum, especially if you voluntarily increase your own contributions.

Ms Vahey says: ‘For most savers, the effect of the cap will be relatively small, and salary sacrifice will still be a helpful way to boost retirement savings. Someone earning £40,000 and exchanging 6 pc of their salary for an employer contribution will see their take-home pay fall by £32 from April 2029.’

This is because standard NI rates will be applied.

But Ms Vahey adds: ‘They should still enjoy NI savings of £160 on the first £2,000 of the exchanged pension contribution.’