Lords move to increase salary sacrifice cap to £5,000 'a pragmatic step'

In a debate earlier this week, Lords discussed a range of amendments to the National Insurance Contributions (Employer Pensions Contributions) Bill, including increasing the annual cap on employee contributions for full national insurance (NI) relief from £2,000 to £5,000.

Other amendments include an exemption for basic rate taxpayers from the £2,000 cap, while another was for any sacrificed contribution above the cap to not be counted as income when working out student loan repayments.

The amended bill will now be debated today before it returns to the House of Commons on 23 March, where further changes may be made to remove these amendments.

Pensions UK executive director of policy and advocacy Zoe Alexander said the industry body was "strongly supportive" of amendments that exempt basic rate taxpayers from limits on using salary sacrifice arrangements, and raise the cap to £5,000, but would prefer the policy to be scrapped altogether.

She said: "These amendments would reduce or remove the negative impacts of changes to salary sacrifice on the majority of savers.

 "To be clear, our preferred outcome hasn't changed. We still believe that changes to salary sacrifice should not take place. Even with these amendments, the policy risks pulling more people off track at a time when pension adequacy is already a serious challenge for many people, including those earning above the median. We should be making it easier for people to save for a decent retirement, not harder."

Alexander added: "With the Pensions Commission now underway, this is exactly the kind of issue that should be considered in the round. Rushing through changes to salary sacrifice ahead of that work risks cutting across the evidence‑based approach the Commission has been set up to deliver."

Isio head of wealth proposition Mark Campbell added: "The Lords' decision to raise the proposed salary sacrifice cap to £5,000 is a welcome and pragmatic step that recognises how central pension saving is to prepare for retirement and long‑term financial health. While the legislation remains contentious, this change recognises the importance, as Baroness Kramer has stated, of encouraging individuals to prepare for their retirement (and notably to do so as early as possible) and reduces a small proportion of the friction of doing so.  

"However, this is more of a tweak to a blunt policy that fails to support the longer-term challenge that many people are facing into – an underfunded retirement exacerbated by the cost of living and poor financial education within the country. Many individuals are having to choose short term needs over longer term security in retirement, and all though this decision by the Lord's is welcome, it goes little by way of addressing the larger and increasingly pressing issues that we face as a society."

Ping pong

AJ Bell senior pensions and savings expert Charlene Young said "policy ping pong" was now in full swing as the bill on pension salary sacrifice changes snakes its way through various key stages to Royal Assent.

She said: "This is more like the end of the first set than the whole match, as the bill will now travel back and forth between the Houses until both agree. This means that the five amendments currently included could be changed again.

"When the cap was announced, the long lead time caused many to believe that the 2029 changes would never see the light of day. Some signposted the fact that the next general election must be held on or before 15 August 2029, and others pointed to the current administration's tendency to U-turn on contentious policies.

"The government has rushed through the draft rules well ahead of time to signal its intention to get them into law, and perhaps because they were aware there would be plenty of back and forth between the two Houses."

This article was first published on Professional Adviser sister title Professional Pensions