The Chancellor’s plan to cap salary sacrifice pension contributions at £2,000 a year could leave the largest UK employers facing additional tax bills of up to £1.5m annually, according to new modelling from Hymans Robertson.
The consultancy firm warns that the change will fall heaviest on organisations that have historically invested most in pension provision, and could force many to reassess future reward strategies. Its modelling shows that while largest corporates will pay the biggest tax bills, the impact will be felt most, in relative terms, by professional services companies, such as lawyers accountants and financial services firms.
Employees at these firms typically have higher salaries so make wider use of such schemes. These can be highly tax-efficient ways of making generous bonus payments, with neither the employer and employee avoiding NI and tax on these payments.
In her Budget speech Rachel Reeves stated that reforms needed to be made as these schemes were not designed to enable tax savings for those in receipt of generous bonuses working in the financial sector.
Hannah English, partner and head of DC corporate consulting at Hymans Robertson, said the reform places responsible employers in a difficult position. “This is not simply about pension saving; it is about good business practice. Employers whose default contributions are higher will carry the greatest burden,” she said. “They now face a tough choice: maintain strong pension design and absorb higher costs, or reduce contributions and scale back support for long-term retirement adequacy.”
The Treasury intends to prevent employees from making more than £2,000 a year in pension contributions via salary sacrifice—citing concerns that high earners, particularly in financial services, use the mechanism to shield large bonus payments from income tax and National Insurance.
Hymans Robertson modelled the impact on three typical employer profiles already operating sacrifice schemes. It estimated that a medium-sized professional services firm, with a workforce of 1,000 average salary of £67,000 and good pension provision faced an additional annual cost of £830,000, representing a 1 per cent increase in total employment costs.
Meanwhile the cost to a large blue-collar firm might be £1.4m — a 0.3 per cent increase in total employment costs. This assumes a 10,000 manufacturing or energy company with good pensions and an average salary of £43,000.
A large retailer or hospitality firm, with 90,000 staff, modest pensions and a median salary of £33,000, would pay an extra £1.5m under this scheme – just a 0.04 per cent increase.
English said this distribution highlights a “perverse outcome” whereby firms with weaker pension provision face almost no impact, while those supporting long-term member savings face significant new costs. “Businesses that have never invested meaningfully in pensions will feel little impact, leaving them with little incentive to offer a pension to their employees,” she added.
Hymans stresses that the reforms will not affect workers contributing below the £2,000 threshold. But higher contributors—particularly senior staff and those sacrificing bonus payments—would see reductions in take-home pay once employer NI savings are removed.
In the large retail example, an employee contributing £6,000 a year could see net pay fall by around £80, while someone contributing £10,000 could lose £160.
Longer term, English warned the policy risks undermining retirement outcomes for those who can afford to save more. “If the government’s ambition is to drive productivity and long-term growth, constant tinkering with pension rules creates uncertainty and undermines trust,” she said. “What savers and employers need is stability and simplicity that will lead to adequacy. This move does not achieve that.”
The proposed cap—scheduled to take effect in 2029—comes on top of this year’s National Insurance changes, which saw NIC rates increased to 15 per cent and thresholds lowered. Hymans estimates these NI reforms alone increased annual employer costs by £1.2m for medium-sized firms, £9.9m for large blue-collar employers, and £79m for the largest retailers.
English said that in this context, the new cap is likely to reshape employer behaviour. “Fewer than 10 per cent of employers would be able to absorb the cost of a reduction in NI savings on pension contributions. Our research suggests 43 per cent may review their reward strategies as a result of the announcement.”
Potential employer responses include moderating future pay rises, reducing pension contributions, or slowing recruitment to offset increased costs.
Hymans also highlights the administrative challenges ahead. The consultancy notes that operationalising a £2,000 annual cap inside payroll and benefits systems will require significant development work—and raises questions about how HMRC will monitor compliance.
English said the long lead-in time reflects this complexity: “It’s no surprise that the change will not commence until 2029. Careful consideration will need to be made around the logistics of implementing the cap and providing employers time to set this up.”
