Salary sacrifice limits would have the greatest impact on those on ordinary incomes, the study found

Reeves’ tight budget measures range from freezing income tax thresholds to new levies on milkshakes and lattes as he seeks to reduce the UK’s fiscal space.

But it was his decision to scrap the salary sacrifice scheme that sparked the biggest reaction from employers and employees.

In the most popular form of salary sacrifice, namely pension contributions, employees implicitly take a pay cut in exchange for increased pension contributions, potentially pushing them back below the income tax threshold.

The system is most effective for those on incomes and families above the £100,000 threshold, so they can get back 30 hours of free childcare.

But a tax-free cap of £2,000 per year will apply from April 2029, meaning further contributions will be subject to the standard National Insurance rate of eight per cent for salaries below £50,270 and two per cent for income above that.

Reeves supports the change, stating that the system ultimately disadvantages those earning minimum wage and other casual workers.

In his speech on Wednesday, Reeves said: “Salary sacrifice to pension funds, which is intended to be a small part of our pension system, is expected to triple in cost from £2.8 billion in 2017 to £8 billion in 2030.

He noted that the scheme primarily benefits high earners, particularly “those working in the financial services sector who put their bonuses into tax-free pension funds”, while those earning the minimum wage “get no benefit at all”.

However, according to personal finance platform Finder, it is basic rate taxpayers and higher rate taxpayers who will suffer the most from the restrictions.

Those who earn will lose

According to analysis by Finder, the average earner who sets aside 15 per cent of a salary sacrifice scheme, 12 per cent of personal allowance and 3 per cent of employer contributions, could lose £215 of their annual take-home pay due to the new cap.

This will have the greatest impact on those earning £52,720, losing £341.80 a year, while those earning £39,039, which is the UK average, will lose £215.

In contrast, someone on a salary of £75,000 per year, saving at 15 per cent, would only receive a pay reduction of £140, as high earners are only charged national insurance at two per cent.

As industry figures recommend recipients save at least 15 per cent into a pension fund to ensure adequate retirement savings, concerns are rising that the cap “could disrupt” saving habits, with around 7.7 million workers in the UK using the scheme.

George Sweeney, personal finance expert at Finder said: “For a budget that carries the biggest burden, it is surprising that the average worker… would be worst hit in terms of take-home pay by the new salary sacrifice cap.”

“This new salary sacrifice threshold of £2,000 could change long-term pension saving habits among ordinary people, as some people may choose to reduce their contributions to avoid paying this additional NI or at least minimize its impact.”

Go back below the threshold

While the cap will be a blow to many workers, there are ways to get back under the £100,000 threshold without being subject to high taxes.

ISAs provide a tax-free limit of £20,000 per year, so savers can avoid income and capital gains tax. However, the Chancellor has also cut the cash ISA ceiling from £20,000 to £12,000 by April 2027, so a stocks and shares ISA may be the best option.

Shaz Bishop, wealth manager at RBC Brewin Dolphin, says: “Plan your retirement contributions based on your tax bracket, consider your spouse’s tax position to balance income and assets… and make sure you utilize and maximize all your employee benefits.”