Nearly two in five savers say they will cut back on pension contributions if there is a crackdown on salary sacrifice arrangements in the Budget, new research reveals.

These schemes allow workers to take a supposed 'pay cut', but the money gets ploughed into their pension or put towards some other benefit like childcare instead, and both they and their employer pay less National Insurance as a result.

Chancellor Rachel Reeves is reportedly looking at a £2,000 cap on how much staff pay into pensions using salary sacrifice without having to pay National Insurance, which is 8 per cent on basic rate earnings, and 2 per cent above higher rate thresholds.

Workers who exceeded the cap would have to stump up more to end up with the same amount in their pensions.

Employers pay 15 per cent in NI so would take a bigger hit, sparking fears many would cut pension contributions back to the minimum required under auto enrolment or not increase salaries to offset the extra cost.

When polled on what they what do if salary sacrifice contributions were liable for higher tax, 17 per cent of workers with a pension said they would stop using the scheme altogether, while 21 per cent would reduce the amount they add to their pot when using it.

Some 46 per cent are not confident Government plans for pensions will positively impact their retirement, according to the research done in the past month by the Association of British Insurers, a pension industry lobby group.

And 38 per cent don’t feel confident they will achieve their desired standard of living at retirement, said the survey of 2,000 people, weighted to be geographically and politically representative of the UK.

Last year the ABI partnered with the Reward & Employee Benefits Association, an industry group for human resources professionals, to ask employers how they would react to the Government making them start to pay NI on all pension contributions.

It found 42 per cent out of more than 600 employers of all sizes which pay more than the minimum contribution into staff pensions would consider reducing them if NI was imposed on the payments.

Under auto enrolment, all employers have to pay at least 3 per cent of qualifying earnings - those between £6,240 and £50,270 of salary - into their workers' pensions, and the Government adds a further 1 per cent in tax relief.

Individuals have to put in at least 4 per cent, which totals 8 per cent in all, but if you opt out the free top-ups on your contributions are lost too.

To attract and retain staff, many employers are more generous and pay above the minimum. Some offer valuable matched contributions, where they put extra cash in your pot if you do too, as well as running salary sacrifice schemes.

Yvonne Braun, director of policy for long-term savings at the ABI, says it's worrying so many people say they would cut their pension contributions, and that nearly half of employers might do too if costs rose.

'This isn’t just a problem for lower earners – the Government’s own data shows middle and higher earners are most at risk of falling short of an adequate retirement income,' she says.

Braun points to the Government's move last summer to launch a new Pensions Commission to try to stop future retirees ending up poorer than older people today.

It said at the time that nearly half of working age adults are saving nothing at all into a pension, despite the success of auto enrolment, and nearly 15million people are under-saving for retirement.

'In the Government’s own words, "we are currently on course for tomorrow’s pensioners to be poorer than today’s",' says Braun. 'The constant speculation about changes to pensions tax is eroding trust in the pensions system and risks making a bad situation worse.'

The chief executive of pension firm Aviva, Amanda Blanc, has warned a tax raid on workplace salary sacrifice schemes would put people off saving for retirement.

‘What you’re effectively doing is penalising those employers that actually contribute more to employees’ pensions,’ she told The Times.

‘But you’re also saying to people who save for their pension that perhaps they shouldn’t do it, and I think that’s bad news long-term for the UK if you think about the fact that 15million people in the UK are not saving enough.’

Salary sacrifice cap 'could damage pension pots, pay rises, bonuses and hiring'

Gary Smith, senior partner and retirement specialist at Evelyn Partners, notes that it has now been briefed pension tax-free cash will not be targeted in the Budget, and a cap on salary sacrifice is the most likely way money will be raised from the tax benefits of pensions

‘If these briefings have substance, it is a strategy that makes total political sense for the Chancellor.

'On the one hand raiding tax-free cash would have alienated millions in retirement and pre-retirement, as well as powerful public sector bodies trying to protect the benefits of their members’ gold-plated final salary pensions.

'On the other, a salary sacrifice crackdown will not only swerve a public sector backlash – as the system is not generally used in those schemes – but also it will not affect those already retired.

'Even among those who are still saving into pensions in the private sector, it will not be widely understood or feared, because the effects are somewhat obscure. That’s despite the fact that this could really damage not just pension pots but also pay rises, bonus awards, and businesses’ hiring incentives.'

Smith says it would in effect be a stealth tax on remuneration, and many employers would limit their pension contributions to the minimum or apply a 15 per cent reduction to account for the employer NI.

He adds that there is not a massive amount that people can do about a mooted salary sacrifice clampdown, but you could ramp up pension contributions for the rest of the 2025/26 tax year, because changes are unlikely to happen until 6 April 2026 at the earliest.

Smith says research earlier this year by Towergate Employee Benefits among 500 HR decision makers suggested about 48 per cent of all UK private sector companies offer salary sacrifice schemes, but that rises to 67 per cent at larger firms and 85 per cent at the biggest employers.

Andrew Timpson, employment tax partner at RSM UK, says the Government could reduce the detrimental impact of restricting employer NI savings by allowing people on the national minimum wage to use salary sacrifice schemes.

'This would allow many of the lowest paid workers to finally benefit from this arrangement. There have been many years of lobbying on this matter, and it appears now could be the ideal time for the Government to support millions of working people.'

He warns if the Government goes further than a £2,000 cap and imposes NI charges on all employer pension contributions, this could lead to redundancies and abolition of pension salary sacrifice arrangements.

'In addition, employers restricting their pension contributions to statutory minimums reduces pension savings for employees, impacting the future for millions of working people, as well as disrupting the pensions industry even further.'