The Chancellor has confirmed changes in the Budget announcement to the rules on salary sacrifice pension contributions. Currently, employees can contribute unlimited amounts to their pension via salary sacrifice without incurring national insurance contributions (NICs) on those amounts. From April 2029, only the first £2,000 of sacrificed contributions will remain NICs-exempt. Any excess will be subject to employee and employer NICs.
The policy has been deliberately pitched to exempt people earning what is considered an average salary. An individual earning £40,000 per year and sacrificing 5% of their salary will not pay additional NICs and neither will their employer.
For someone earning £50,000 per annum, the employee will pay £40 in NICs, and the employer contribution will be £75. An individual with a salary of £120,000 per year, would pay £80, and their employer, £600. It should be noted that these figures are based on the default contribution levels, and the actual impact could be much greater for employers where employees decided to salary sacrifice more than these default contribution amounts.
It seems unlikely that there will be any immediate changes to salary sacrifice schemes, as employers and employees could still benefit from almost four years of NICs savings.
Despite changes, it is likely that salary sacrifice schemes will remain popular with employees, at least up to £2,000. For employers, their contribution multiplies up with each employee using a salary sacrifice arrangement. When combined with other policies, such as increases in the national minimum wage, reward budgets may be impacted. It seems likely, however, that employers will take the increase in NICs into account when deciding on future pay increases.
The impact on employers will be greater where they have shared some, or all, of the employer NICs saving resulting from salary sacrifice, with employees by making an extra pension contribution. Unless those employers change the salary sacrifice arrangement, they would be in a position where they have to fund the employer NICs above the £2,000 cap, while still making an extra contribution to reflect a saving that they no longer make.
Of course, employers could look to change salary sacrifice arrangements, but this will involve a change to staff contracts and consultations about the proposed change. In some cases, workers may be told that if they do not agree to proposed changes to employer contributions, this could impact their future pay. Managing these changes could have a knock-on effect on employee retention and recruitment, so some employers may be forced to take steps to soften the impact. Ironically, employers that have been less generous when it comes to sharing the value of the employer NICs with workers, will have less to lose.
Employers could consider switching to higher employer contributions across the board instead of employees having to make a minimum level of contributions, as this would not attract NICs. However, if more money is diverted into employer pension contributions, there will be less available for future pay rises. So, employers will need to decide which is most important.
As the new rules will not take effect until 2029, employers have ample time to budget, review and restructure their arrangements accordingly to ensure they are prepared. Given that the changes are not due to come into effect until shortly before the latest date on which a general election could be held, it is also possible that employers might wait to see whether a change in government brings a reversal of this policy.
Doug Mullen is partner in the employment and pensions team at Anthony Collins
