The House of Lords has passed an amendment to increase the salary sacrifice cap from £2,000 to £5,000, as the legislation passes through parliament.
Under the Government’s original proposal, salary sacrifice pension contributions above £2,000 a year would become subject to National Insurance contributions.
While the controversial legislation is not expected to come into force until 2029, the Government has sought to accelerate its passage through parliament.
The amendment, tabled by Baroness Susan Kramer, received 194 votes in favour, with 140 against, as part of the National Insurance Contributions (Employer Pensions Contributions) Bill.
The £5,000 cap was one of several amendments to the Bill passed by peers. Others include an exemption from the cap for basic rate taxpayers, the exemption of charities and small and medium-sized enterprises from the cap and measures to ensure student loan repayments are not negatively affected.
The Bill will return to the House of Commons for its final debate before receiving Royal Assent.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “Policy ping pong is in full swing as the bill on pension salary sacrifice changes snakes its way through various key stages to Royal Assent.
“But this is more like the end of the first set than the whole match, as the bill will now travel back and forth between the Houses until both agree. This means that the five amendments currently included could be changed again. The Government has rushed through the draft rules well ahead of time to signal its intention to get them into law, and perhaps because they were aware there would be plenty of back and forth between the two Houses.”
Mark Futcher, head of DC pensions at Barnett Waddingham, welcomed the amendment.
“The tabled amendment to increase the proposed salary sacrifice cap to £5,000, if it ultimately remains in place, is a welcome step in recognising the vital role it can play in helping people build their pension savings.
“That said, introducing a cap at any level still risks adding unnecessary complexity for employers and confusion for savers. Our research shows that nearly two thirds of employees weren’t even aware a restriction was planned, despite more than half already using salary sacrifice today.
“With many employers also seeing the system as complicated to operate, policymakers should ask whether the additional administrative burden of a cap and the uncertainty it creates is really worthwhile.”
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