I'm currently earning £58,000 and contribute 28 per cent into a salary sacrifice pension. 

Of that, 24 per cent is my own contribution and 4 per cent is from my employer.

I am concerned about reports of changes to salary sacrifice in the Budget.

Am I correct in assuming I would have to pay 8 per cent National Insurance on any contribution above £2,000?

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Steve Webb replies: Whilst we haven't yet seen the contents of the Budget, it has been widely trailed that the Chancellor will be looking to workplace pensions to help fill the hole in the nation's finances.

One particular area she is expected to consider is what is called 'salary sacrifice'.

In a standard workplace pension arrangement, contributions are made into the pension by both employer and employee.

But the wages paid to the employee – including the part used to fund the employee pension contribution – are subject to both employee and employer National Insurance contributions.

One way to avoid this is if the employer does a deal with the employee. 

The employee agrees to 'sacrifice' part of their salary (perhaps equal to the money they would have paid into the pension) and, in return, the employer commits to paying the entire pension contribution.

The advantage of this is that the employee has a lower headline salary, and so both the employee and the employer pay less in National Insurance contributions (NICs), but the same total amount still goes into the pension.

Scrapping this system altogether would raise the Chancellor around £4billion, but would hit millions of 'ordinary' workers paying basic rate tax. 

Given the concern about preventing losses amongst people on modest incomes, this seems unlikely.

More likely is a cap on the amount of salary that can be sacrificed whilst benefiting from the NI saving. As you mention in your question, a cap of £2,000 has been widely suggested.

The impact may be smaller than you expect 

In terms of the impact of such a cap, a quirk of the NI system means that the effect on you personally might be rather smaller than you expect.

Although we don't know exactly how this new cap might be implemented, one option would be that any employee contribution above the £2,000 currently paid via the employer would in future be subject to NI contributions.

However, the good news for you is that there is an 'upper earnings limit' of £50,270 for employee NI contributions, above which the NI rate drops from the standard rate of 8 per cent to just 2 per cent. 

This means that some of the extra charge – on the amount up to the upper earnings limit – would be at 8 per cent, but the balance would be at 2 per cent.

To be more specific, let us assume that your contribution is 24 per cent of £58,000, which is £13,920, and that this reduces your actual gross salary to £44,080.

If we suppose that £2,000 of salary sacrifice is still allowed, you then face a potential NICs charge on the balance of £11,920. 

Although we don't know exactly how it would work, we might expect you would pay the full 8 per cent on the slice up to the upper earnings limit and then 2 per cent on the balance. In your case this means just over half at the standard 8 per cent rate and the balance at the lower 2 per cent rate.

The news is less good for your employer, however, as there is no cap on employer NICs.

This means they would potentially pay the full 15 per cent rate on £11,920, a hefty extra bill of £1,788. 

The only potential offset to this is that all employers have a £10,500 per year 'employment allowance' which they can offset against their total NICs bill. 

If you work for a small firm, your employer may still have some unused Employment Allowance. But, if not, they would feel the full force of the change.

I should stress that this is a guess as to how such a change might be implemented. 

An alternative – though more complicated – approach would simply be to create some sort of 'salary sacrifice surcharge' on the extra amount, and this could be the full NI rate of 8 per cent for workers and 15 per cent for firms.

We also do not know how employers would react to such a change.

Clearly this would be a further squeeze on their budgets, coming on top of last year's big increase in employer NICs. 

There could be a mix of reductions in future pay rises, less generous pension arrangements, reductions in employment or a combination of all of these.

Given that as a nation we are already saving too little for our retirements, anything which discourages employers and employees from putting meaningful amounts into workplace pensions has to be bad news.