Why £50,000 earners could lose more than higher-paid workers

Workers earning around £50,000 could lose more from the government’s incoming salary sacrifice pension cap than colleagues earning above that level, according to analysis from investment platform AJ Bell.

The issue stems from how National Insurance thresholds interact with the new £2,000 limit, which takes effect on 6 April 2029.

From that date, the amount of pension contributions made through salary sacrifice that are free from National Insurance will be limited to £2,000 a year, Rachel Vahey, Head of Public Policy at AJ Bell, confirmed.

Contributions above that threshold can still be made through salary sacrifice arrangements, but employee contributions over the cap will be treated like other workplace pension contributions and made subject to employee and employer National Insurance.

The rules were passed into law through the National Insurance Contributions (Employer Pensions Contributions) Act 2026, which received Royal Assent in late April 2026.

How the threshold creates the squeeze

National Insurance is charged at 8% on earnings between £12,570 and £50,270, then drops to 2% on earnings above the upper limit.

Because of this, any excess sacrifice over the £2,000 cap is charged at 8% for those earning just below £50,000, while those earning above £50,000 pay only 2% on the same excess, according to AJ Bell.

That leaves workers sitting just under the upper earnings limit facing a steeper proportional hit than higher earners on the portion of contributions that breach the cap.

AJ Bell said the biggest impact will fall on those earning between £45,000 and £50,000, whose take-home pay decreases more than other groups as a direct result of the threshold mechanics.

The effect means the change cannot be summarised as higher earners simply taking the largest loss, which makes it harder for savers to anticipate.

What it costs in real terms

AJ Bell illustrated the impact using a worker earning £40,000 who exchanges 6% of their salary for an employer pension contribution.

From April 2029, that worker would see take-home pay fall by £32, while still securing National Insurance savings of £160 on a £2,000 pension contribution. The figures assume a 6% employer match.

HMRC estimates more than 2.8 million people could cut their pension contributions once the cap is introduced, a figure revealed through a Freedom of Information request. HMRC broke that down as 2.2 million workers earning above the £50,270 upper earnings limit and 666,000 who are generally basic rate taxpayers.

The Office for Budget Responsibility has warned that the behavioural impact of the cap on pension saving is highly uncertain.

Employer responses are expected to vary in the run-up to 2029. AJ Bell said some employers may formalise current arrangements by increasing pension contributions in place of wage growth, while others may reduce the amount of salary employees exchange to £2,000 or stop offering pension salary sacrifice altogether.

What stays the same

Vahey said the cap changes the National Insurance benefits of salary sacrifice but does not alter the income tax advantages of paying into a pension.

Pension contributions remain exempt from income tax, and workers can still claim pension tax relief up to their marginal rate. Contributions to schemes such as SIPPs continue to reduce a saver’s adjusted net income, which can pull earners out of higher rate tax bands or other tax traps while boosting retirement savings.

The Pensions Commission has estimated that 15 million people are currently under-saving for retirement.

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