Speculation around the upcoming Autumn Statement on 26 November suggests that pensions salary sacrifice arrangements may be under review. This could have significant implications for employers and employees if changes are implemented.
Under salary sacrifice arrangements, employees agree to a reduced salary in return for a benefit such as employer contributions to a registered pension scheme. Employer contributions to a pension scheme are not subject to tax if within an employee’s annual allowance and exempt from social security contributions. Salary sacrifice arrangements for pension contributions offer national insurance contributions (NICs) savings for employers (15%) and employees (8% or 2%) on amounts sacrificed. The employer savings of NICS are sometimes passed on to the employees as increased employer pension contributions or to fund other benefits.
Some reports suggest that the Chancellor is considering removing or capping the NI exemption from salary sacrifice for pension contributions. If such a change is announced, this will eliminate the NICs savings, significantly reducing incentive of operating salary sacrifice for pensions. The proposed changes may also affect other salary sacrifice benefits. As with previous reforms to NICs, any changes to salary sacrifice arrangements will, ultimately, impact on employees’ net pay and benefits.
No formal proposals have been published, but with the constraint of not raising taxes and NICs for workers, pensions may be targeted as some of HM Revenue and Custom’s own estimates put the net costs of income tax and NICs relief on pensions respectively, at £28 billion and £23.5 billion (2023/2024).
Any changes to salary sacrifice could have far-reaching implications, not just for retirement planning, but for broader reward, retention and mobility strategies.
Bina Gayadien is a tax partner at Spencer West
