The budget froze income tax thresholds and the salary level at which graduates start repaying student loans, while also introducing a £2,000 annual cap on salary sacrifice pension contributions starting April 2029. Salary sacrifice schemes allow employees to contribute part of their salary to pensions tax- and National Insurance-free. Above the cap, contributions will attract 8% National Insurance for basic-rate payers, compared with 2% for higher-rate earners.
This structure disproportionately affects workers earning £40,000–£52,000, who could face higher effective tax rates than higher earners. For example, a £52,000 earner making 10% employee pension contributions could pay an extra £256 a year in National Insurance, compared with £160 for someone earning £100,000. The combination of capped pension contributions, frozen tax thresholds, and student loan repayments creates the “triple whammy” effect.
The freeze on the £29,385 student loan threshold for Plan 2 loans until April 2030 means graduates repaying loans will continue to repay 9% of income above the threshold, adding to the financial burden on middle earners.
Tim Camfield from LCP noted: “Repeated freezes of tax thresholds could push many middle earners into higher-rate tax bands for the first time, compounding the impact of these measures.”
Rachel Vahey of AJ Bell reassured that despite the cap on salary sacrifice savings, pension contributions remain exempt from income tax up to the marginal rate, and there is no immediate need to change pension arrangements. However, the structure does mean some middle earners could face higher National Insurance bills than higher-earning colleagues.
