Salary sacrifice pension cap would remove vital cost-saving tool for employers, experts warn

Business and financial experts have strongly criticized a potential crackdown on salary sacrifice pension benefits in the next Budget, warning that the move could amount to a hidden hike in employer national insurance and leave businesses with fewer ways to manage rising recruitment costs.

Rumors are circulating that the Chancellor may put a big cap on the amount employees can sacrifice towards their pensions, with some suggesting the annual allowance could be cut to less than £2,000. Salary sacrifice agreements allow employees to give up a portion of their gross pay in exchange for non-cash benefits such as pension contributions. Because the adjustment is made before tax and National Insurance are calculated, both employers and employees reduce their National Insurance liabilities.

As the Treasury Department looks for ways to plug a large financial gap, companies are warning that unwinding payroll sacrifice will hurt companies at a time when wage pressures are already severe. Many fear that if pension sacrifice is restricted, electric vehicle salary sacrifice schemes could be next, undermining one of the most effective tools employers have used to promote green transport adoption.

There is also profound uncertainty about when any changes will take effect. Some sources believe the government may act immediately on Budget Day; Others believe the reduction could be delayed until April 2026. If implemented next year, employers may rush to secure salary sacrifice arrangements before the window closes.

Luke James, tax director at Sheffield-based Gravitate Accounting, said capping the allowance would remove an important financial tool when businesses need it most. “In today’s tight labor market and cost-sensitive business environment, removing or capping salary sacrifice will strip employers of a critical flexibility tool,” he said. “Salary sacrifice is vital today because it is one of the few tools employers have to manage rising costs while still offering competitive and meaningful benefits. It allows companies to offer stronger benefits without increasing payroll spending, and helps support employees’ financial well-being in a tax-efficient way.”

Any cap would look like a tax increase in disguise rather than a move toward equity, said certified wealth manager Philly Bonya of Philly Financial. She warned that the consequences could extend beyond pensions, with employers forced to rethink bonus strategies and vulnerable green transfer plans. She also noted that parents earning around £100,000 could lose access to funded childcare hours, as salary sacrifice often keeps them under the threshold. “The timing question only adds to the tension,” she said. “If there are changes on Budget Day, businesses will not have time to prepare. Businesses need stability, not sudden changes in rules.”

Others warned of unintended consequences for the broader economy. Benjamin Woodhouse, co-owner of Ballgaard Engineering Ltd, said the proposal sounded like “a headline with little thought behind it,” and wondered how the restriction would impact the auto industry if electric vehicle schemes were eventually included. He fears that Labor may only get a marginal increase in revenues while doing much greater damage to sectors that rely on car rentals and employee mobility.

Financial adviser Michelle Lawson, director of Lawson Financial in Fareham, expressed frustration at the growing uncertainty surrounding tax and employment policy. “How anyone can plan beyond tomorrow now is beyond my control,” she said. “Businesses plan months or years ahead around progress, investment and resources, and the government may be about to throw more wrenches in the business. Salary sacrifice benefits are tax-efficient but also help protect the workforce and keep them medically and at work fit. Removing them can make it more difficult to keep them.”

With the Budget deadline just days away, businesses say they need clarity – and fear the surprise move could undermine recruitment, employee wellbeing and long-term financial planning just as economic pressures on employers reach their peak.