Middle earners hit hardest as Budget delivers ‘triple whammy’ tax squeeze

Taken together, these three decisions will hit workers earning between £40,000 and £52,000 far more than someone on £100,000, analysis from pensions consultancy LCP shows.

The disparity arises because national insurance is charged at eight per cent on income up to £50,268, before falling to just two per cent on earnings above that cut-off.

Tim Camfield from LCP said: “To make matters worse, the repeated freeze of tax thresholds could lead many of them to become higher-rate taxpayers for the first time in the coming years. This is truly a triple whammy for this group.”

The salary sacrifice cap will apply from April 2029, limiting the amount of pension contributions that can escape national insurance to £2,000 a year.

Currently, employees using these schemes pay neither national insurance nor income tax on the portion of salary they sacrifice for benefits such as pension contributions.

Once the cap is exceeded, workers will be required to pay national insurance on additional amounts.

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A quirk in the tax system creates the unfair outcome: those earning below £50,268 pay national insurance at eight per cent, whereas the rate drops to just two per cent for income above this threshold.

This structure means basic-rate taxpayers face four times the national insurance charge of their higher-earning counterparts on pension contributions exceeding the new limit.

The chancellor has also frozen the £29,385 threshold at which graduates begin repaying their student loans until April 2030, affecting those on plan 2 loans who studied between 2012 and 2023.

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These borrowers must repay nine per cent of earnings above this level.

For a graduate on £52,000 using salary sacrifice, the combined effect creates an effective tax rate of 17 per cent once their £2,000 allowance runs out, accounting for both increased national insurance and loan repayments.

Despite the apparent unfairness of these measures, experts advise against hasty changes to existing pension arrangements.

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Rachel Vahey from investment firm AJ Bell said: “Despite the national insurance savings being capped, pension contributions will still be exempt from income tax, and workers can still enjoy pension tax relief up to their marginal rate of income tax.”

She added there is “no need to rush and make changes” to current pension setups.

However, she acknowledged that this peculiarity in the tax rules means certain workers could face a larger increase in their national insurance contributions than colleagues earning substantially more.