National Insurance Contributions (Employer Pensions Contributions) Bill

Lord Ashcombe Excerpts

Wednesday 4th February 2026 Lords Chamber

[Lord Ashcombe (Con)]

My Lords, I wish to express deep concern about the Government’s decision to impose a £2,000 cap on salary sacrifice arrangements for pension contributions. This measure may appear technical, but its consequences for retirement saving are anything but trivial. It raises serious questions about the coherence of the Government’s approach to pension adequacy at a time when the nation can ill afford missteps.

Salary sacrifice has long been a legitimate and widely used mechanism, enabling employees to exchange part of their salary for pension contributions, benefiting from both tax and national insurance relief, as we have heard. It is not a loophole. It is not an avoidance scheme. It is a deliberate feature of the system that encourages people to save more for their retirement. By imposing this cap, the Government are restricting one of the few tools that has demonstrably helped individuals to boost their pension savings in a tax-efficient manner.

This decision comes at a time when the UK is confronting a substantial and widening retirement savings gap and when an independent commission is actively considering how best to strengthen pension adequacy. The evidence is stark. The Department for Work and Pensions acknowledged in 2025 that around 14.6 million working-age people are undersaving for retirement. The Scottish Widows Retirement Report 2025 shows that only 30% of the population is currently on track for a “comfortable retirement”, while 39% are at clear risk of falling short. Mercer—I declare my interest as an employee of their sister company Marsh—has repeatedly highlighted, most recently in 2024, the need for higher contributions if we are to close the savings gap.

Against this backdrop, it is difficult to understand how the Government can justify a policy that will, in effect, discourage additional voluntary saving. The commission’s message has been unambiguous: we must help people to save more for their later life, not place fresh obstacles in their path.

The scale of the impact is not marginal. According to the Government’s own explanatory notes, 3.3 million savers—around 44% of employees using salary sacrifice—stand to be affected. Many of these would not be considered high earners exploiting generous tax reliefs. Furthermore, there are lower and median earners who make occasional larger contributions when they can, often after life events or periods of financial stability. This cap will hit them the hardest. It risks undermining the ability of savers to build a secure retirement income at precisely the moment when demographic pressures, an ageing population and rising life expectancy make adequate saving more essential than ever.

There is a fundamental question of fairness. The pension adequacy commission is tasked with ensuring that all workers can aspire to a decent retirement income. Yet this cap risks creating a two-tier system: those who wish to save more are restricted, while those already struggling to save enough continue to face structural barriers. Rather than reducing inequalities in retirement outcomes, this measure threatens to entrench them.

The implications extend beyond individuals. Some 290,000 employers currently use salary sacrifice arrangements, benefiting from reduced employer national insurance contributions. If the cap reduces participation, employers will face higher national insurance liabilities, increasing the cost of employment. The OBR suggests that many employers will shift to ordinary pension contributions, including relief at source schemes.

Under these arrangements, employees will pay full income tax up front and reclaim it later, effectively giving the Exchequer an interest-free loan. In 2029-30, this manoeuvre raises £4.85 billion, before falling to £2.29 billion the following year when individuals reclaim the tax on the previous year. It is hard to avoid the conclusion that the Government are playing cash-flow games with workers’ retirement savings while imposing yet another cost on employers. At a time when economic growth is desperately needed, this policy risks becoming yet another drag on the very companies we rely on to invest, innovate and employ. I urge the Government to reconsider.

A pensions system must be judged by its ability to help people build security for later life. Policies that restrict saving, complicate incentives or undermine confidence run counter to that mission. If we are serious about addressing the challenges of an ageing society, then tax and national insurance policy must align with and not work against the goal of pension adequacy. The Government still have time to correct their course. I hope they will do so, in the interests of savers, employers and the long-term financial health of our country.