As covered by My Money Matters, a new cap on pension contributions is on the way. Find out why we believe it will hurt the people who need to save for their retirement the most.

From April 2029, a new limit on pension contributions will be introduced. After this date, the amount of money employees can contribute to their pensions via salary sacrifice that are exempt from National Insurance contributions (NICs) will be capped at £2,000 a year. 

If you contribute above this amount, you will need to pay NICs on the money. This will amount to 8% for earnings up to the Upper Earnings Limit of £50,270, and 2% on earnings above the threshold. (Income tax relief on your pension contributions is not affected.)

The government’s rationale for this change is that, “The costs of relief through salary sacrifice relate disproportionately to pension contributions from those on higher incomes. It makes the system fairer and more sustainable”. 

However, while yes, this cap will absolutely impact higher earners who are able to invest more in their pensions, we believe it could also impact a group of people who have already missed out on other pension legislation and benefits, and are simply trying to catch up. There is also evidence that it could have a knock-on financial impact on “ordinary workers” too.

Why the government’s decision seems bizarre to us

The reality is that many people in the UK are significantly underprepared for retirement, and risk falling into pension poverty; something the government is acutely aware of. 

In 2025, they revived the landmark Pensions Commission to “examine why tomorrow’s pensioners are on track to be poorer than today’s and make recommendations for change”. And an interim report from the commission found that 45% of working-age adults in the UK are not saving into a pension at all, and at least 15 million people are not saving enough to retire.

This obviously concerned the government, as Minister for Pensions, Torsten Bell, MP, commented: 

“The Pensions Commission sets out clearly the scale of the challenge: not enough people are saving for retirement, and many of those that are aren’t saving enough. The Commission warns that without action millions more people could be at risk of becoming reliant on state support in retirement.”

This makes the government’s decision to reduce a financial incentive to save for the future look bizarre. On the one hand, they are actively encouraging us to save more for our retirement, and on the other, they are making it harder by reducing the incentive to save.

Why we believe this cap will hurt people over 50

As someone who is passionate about helping people prepare for retirement, I find this cap particularly perplexing and damaging. 

The people often cited as the worst off for pension planning are those over the age of 50. In fact, research by SunLife found that nearly 7 million people in this group in the UK have no private pension savings.

There are many reasons why people over 50 may have little-to-no pension (this was a topic covered on a recent PensionBee podcast episode). They include missing out on ‘gold standard’ defined benefit pension schemes, and the benefits of auto-enrolment. 

Women also can find themselves trailing behind men when it comes to retirement savings, thanks to career breaks due to childcare, and the Gender Pay Gap. It’s tougher too finding the money to invest in a pension when you are younger and paying for children, as well as getting on the housing ladder.

People who find themselves far behind where they need to be in retirement savings – as I did in my late 40s – can feel like they have a narrow window to improve their position, and save as much as they can during their remaining working years. As Paul Johnson, columnist for The Times and Director for The Institute for Fiscal Studies advises, “a typical graduate with a couple of children should do at least two thirds of their pension saving after the age of 45”.

It’s these people, not “those on higher incomes” who I believe will feel the pinch from this cap the most, as every penny they save is needed for their future, and they often don’t have other reserves of wealth to fall back on. For them, salary sacrifice isn’t a way to avoid higher tax bills; it’s an important boost in their efforts to avoid pension poverty.

Is this cap a ‘middle-income trap’?

There’s another issue with the thinking behind this pension cap. While the government says the current system “disproportionately” benefits people on higher incomes, and that they want to make the system “fairer and more sustainable”, experts have described it as a “middle-income trap”.

The main issue is that employee National Insurance rates vary by earnings band. Under the new pensions cap, employees earning between £35,000 and £50,270 could face employee NI at 8% on their salary sacrifice pension contributions above £2,000. However, employees already above the Upper Earnings Limit could pay employee NI at 2% on the same excess contributions.

This means that some middle‑income savers could end up paying four times the NI on pension savings above the cap than with higher earners. Which surely goes against the very stated intention of the cap?

How much will the new 2029 pensions cap cost you?

So how much NICs could you end up paying after 2029? Here’s a quick guide of how much the new 2029 pensions cap could cost you:

• If you contribute £300 a month (£3,600 a year) you could pay £128 a year in NICs.
• If you contribute £500 a month (£6,000 a year) you could pay £320 a year in NICs.
• If you contribute £800 a month (£9,600 a year) you could pay £608 a year in NICs.
• If you contribute £1,000 a month (£12,000 a year) you could pay £800 a year in NICs.

While these might not sound like huge sums of money, over time, with compound growth, they can add up to a painful loss. Here’s what you could have earned over 20 years with an average interest rate of 5% from the amount you paid in NICs:

• If you contribute £300 a month, your NIC payments could have lost you £4,229.
• If you contribute £500 a month, your NIC payments could have lost you £10,578.
• If you contribute £800 a month, your NIC payments could have lost you £20,101.
• If you contribute £1,000 a month, your NIC payments could have lost you £26,450.

But these aren’t the only potential losses you might see.

How will the cap impact employers – and all employees?

Here’s another important point to consider. In order to participate in salary sacrifice, your employer needs to change the terms of your employment contract. And they do not need to do this. In other words, your employer can prevent you from contributing to your pension visa salary sacrifice if they wish.

Currently around 48% of businesses offer salary sacrifice, enjoying the benefit of reduced NICs through the lower taxable income. However, with the new pensions cap, after April 2029 any contributions made above the £2,000 threshold via salary sacrifice will also be subject to standard Class 1 employer NICs.

This will increase employers’ salary bill, and leaves them with three broad choices:

1. Continue to allow salary sacrifice and pay the extra NICs
2. Pass on the new NI costs to employees
3. Stop salary sacrifice and move to employer pension contributions

According to Money Marketing, only 18% of employers have “no plans to make any adjustments to schemes when the new rules announced by the chancellor come into effect”. Others may well be looking for ways to mitigate their extra costs (if they choose to offer salary sacrifice at all) – and this could be passed down to their employees.

Indeed, there are already worrying signs that this pension cap could impact workers. Research by Royal London found that “employers are considering cutting costs through recruitment freezes, reducing employer pension contributions or stopping any increases to their contributions” to mitigate increased NIC costs.

Other experts also predict that employees could ultimately pay the price through “slower pay progression, scaled-back benefits, and/or less generous employer pension contributions”.

This is echoed by former pensions minister Steve Webb, who noted that data from The Office for Budget Responsibility (OBR) “indicates that many of the 4.3m people who receive salary sacrifice contributions below the cap could still be negatively affected by the government’s move”.

In other words, it’s not just the wealthiest earners who will pay the price for the pensions cap, nor solely people participating in salary sacrifice, but “ordinary workers” too.

Why private sector employees will pay four times more

The pensions cap will also disproportionately impact the private sector. According to the Institute for Fiscal Studies, “18% of private sector employees make salary sacrifice pension contributions of more than £2,000 per year, compared with only 7% of public sector employees”.

As a result, private sector employee will be hit with an average yearly increase in employer NICs four times higher than the private sector (£151 per employee versus £37). It’s worth noting that “public sector employees are more likely to receive large employer pension contributions, which are unaffected by the policy”.

Why we believe the pension cap is bad news for ALL employees

While, on the face of it, the new pensions cap looks like it will only impact the top tier of earners who are able to contribute large amounts to their pensions via salary sacrifice, the reality appears to be very different.

If you are hoping to catch up on missed opportunities to save for your retirement, and boost your pension as much as you can in your last years of working, this could cost you dear. And even if you aren’t taking advantage of salary sacrifice, you could find the pension cap impacting you through lower salary, fewer workplace benefits and reduced employment opportunities.

As Minister for Pensions, Torsten Bell MP, said: “Britain has got back into the pension saving habit, but the job is only half done with tomorrow’s pensioners still on track to be poorer than today’s.” We need people in the UK to ‘finish the job’ and save as much as they can for their retirement. And putting a cap on this is not the answer.

About the Author: Hannah Martin

Hannah Martin is the founder of Rich Retiree. She is a qualified psychotherapist, hypnotherapist and NLP practitioner, and an expert on female finance and pensions. A former award-winning advertising copywriter, she is also the founder of Talented Ladies Club, a global online magazine for ambitious women.