Wednesday’s (26 November) Autumn Budget ended weeks of speculation around potential changes to pensions salary sacrifice arrangements when Chancellor Rachel Reeves announced that national insurance (NI) relief would be capped at £2,000 per person each year from 2029.
Unsurprisingly, we have seen a flurry of comments on the move since it was announced as the industry works to predict its impact. So, what will this mean for employers and employees? And how will it impact future pension savings?
According to government estimates, 74% of individuals who currently contribute to a pension via salary sacrifice will be unaffected. At the time of writing, it also looks as if income tax relief on pensions salary sacrifice will be unaltered.
However, for employers that are already feeling the pinch from the increase in NI contributions, this additional cost may present further financial pressures. How many employers will realistically be able to fund an additional 15% on top of all employee contributions that exceed £2,000 per year? In the coming years, could we see employers begin to move away from pensions salary sacrifice arrangements, particularly if they have a high-paid workforce?
Many organisations, which use the NI savings from pensions salary sacrifice to fund other employee benefits or additional pension contributions for staff, will also need to consider if they will be able to continue to fund these initiatives for employees once faced with a reduction in NI savings.
Ultimately, the over-riding concern seems to be that it will result in some individuals reducing the amount they save for retirement, namely by reducing contributions to ensure they remain below the £2,000 annual cap. Any change to pensions will also inevitably impact saver confidence to some extent.
As it stands, we have yet to experience the full impact of the UK’s retirement crisis, so anything that could potentially exacerbate this further is a significant risk. With just over three years until this change comes into force, however, we have some time to wait for its full effect to become clear.
In the meantime, one of the dominating messages we have seen over the past few days is to make the most of pensions salary sacrifice while it is still available in its current form.
Debbie Lovewell-Tuck
Editor
@DebbieLovewell
