Changes announced in the Budget will affect the amount some pension savers can contribute without incurring National Insurance (NI) charges.
Starting in 2029, a £2,000 annual cap will be implemented on the amount shielded from employer and employee NI contributions through salary sacrifice.
Currently, a significantly higher limit exists for employer-paid contributions, a scheme designed to encourage pension savings.
The Office for Budget Responsibility (OBR) estimates that this measure will generate an additional £4.7 billion in NI contributions in 2029.
Salary sacrifice allows employees and employers to allocate a portion of pre-tax salary to a pension, avoiding National Insurance Contributions (NICs) and income tax. Employees agree to a lower salary in exchange for a tax-free contribution to their pension fund with each paycheck.
Chancellor Rachel Reeves stated the current system disproportionately benefits high-income earners and those in financial services, “who can put their bonuses into pensions tax-free”.
Reeves described the £2,000 salary sacrifice cap as a “pragmatic step,” ensuring that low and middle-income earners can continue using the scheme “without paying any more in tax.”
The salary sacrifice policy also reduces overall employer National Insurance Contributions (NICs). A cap could increase NICs bills for companies or prompt a reassessment of offering the benefit.
With the cap, salary sacrifice contributions exceeding £2,000 will be subject to NICs for both employees and employers. Basic rate income taxpayers will pay NICs at 8%, while higher rate taxpayers will pay 2%. Employers will pay NICs at 15%.
Approximately one-third of private sector employees and one-tenth of public sector workers utilize salary sacrifice for pension savings. HM Revenues & Customs analysis suggests about 7.7 million employees used it in 2024.
Former pensions minister Steve Webb, now a partner at LCP, suggests the delay in implementing National Insurance payments on salary sacrifice until 2029 makes it unlikely the chancellor will raise the OBR’s estimated £4.7 billion.
“The decision not to implement this change until 2029 creates a huge opportunity for firms to restructure the way that they offer pay and pensions in order to mitigate or eliminate this new charge,” Mr. Webb stated.
“There is a high probability that this policy will only raise a fraction of the amount expected by the chancellor.”
Baroness Ros Altmann, also a former pensions minister, described the current salary sacrifice system as “opaque” due to its reliance on individual agreements between companies and workers to reduce tax liabilities, adding that the proposed changes “will add to that.”
“There’ll be extra National Insurance costs for employers, lower take-home salaries potentially and then there’s the administration costs of any change in pension policy.”
“Employers may just think the administration costs of changing this isn’t worth it and scrap the whole thing,” she added.
“Overall, I’d say this is a net-negative in terms of getting the UK saving more.”
Others in the pensions industry suggested the removal of the tax break could lead to companies reducing planned pay rises and contributing less to pensions overall.
“Expect to see employers reining in their contributions,” said Alex Foster, a Partner at Blick Rothenberg.
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