Key Takeaways
- The UK government has announced a cap of £2,000 per year on salary sacrifice contributions that can be shielded from employer and employee National Insurance (NI) contributions.
- The measure is expected to raise £4.7bn in extra NI contributions in 2029, but some experts believe this estimate may be overly optimistic.
- The cap will affect around 7.7 million employees who use salary sacrifice schemes for their pension savings.
- Employers may face higher NI bills or reconsider offering the perk due to the changes.
- The removal of the tax break could lead to companies reducing planned pay rises and contributing less to pensions overall.
Introduction to Salary Sacrifice
The UK government has announced changes to the salary sacrifice scheme, which allows workers to agree with their employers to take a portion of their salary and put it into a pension before it is subject to National Insurance Contributions (NICs) and income tax. This scheme has been seen as a way to encourage workers to pay into their pensions, but the government has argued that it currently favours high-income earners and those who work in financial services. Under the new measures, a cap of £2,000 per year will be introduced on the amount that can be shielded from employer and employee NI contributions.
Impact on Pension Savers
The cap on salary sacrifice contributions will affect around 7.7 million employees who currently use the scheme to save for their pensions. Workers who pay income tax at the basic rate will pay NICs at a rate of 8% on contributions above £2,000, while higher rate taxpayers will pay 2%. Employers will also face higher NICs bills, paying 15% on contributions above the cap. This could lead to companies reconsidering whether to offer the perk, or reducing the amount they contribute to pensions. The changes are expected to raise £4.7bn in extra NI contributions in 2029, according to the Office for Budget Responsibility (OBR).
Reaction from Experts
Former pensions minister Steve Webb has argued that the delay in implementing the changes until 2029 means that it is unlikely the government will raise the estimated £4.7bn. He believes that companies will have time to restructure their pay and pension schemes to mitigate or eliminate the new charge. Baroness Ros Altmann, also a former pensions minister, has described the current salary sacrifice system as "opaque" and argued that the proposed changes will add to this complexity. She believes that the extra National Insurance costs for employers, lower take-home salaries, and administration costs could lead to companies scrapping the scheme altogether.
Potential Consequences
The removal of the tax break could have significant consequences for pension savings in the UK. Employers may reduce planned pay rises and contribute less to pensions overall, which could negatively impact workers’ retirement savings. Alex Foster, a Partner at Blick Rothenberg, has warned that employers may "rein in their contributions" as a result of the changes. This could lead to a reduction in the overall amount of money being saved for pensions, which could have long-term implications for workers’ retirement income.
Conclusion
The changes to the salary sacrifice scheme are intended to raise revenue for the government, but they may have unintended consequences for pension savers and employers. The cap on salary sacrifice contributions could lead to higher NI bills for companies and workers, and may result in companies reducing their contributions to pensions. While the government argues that the current system favours high-income earners, the changes may ultimately lead to a reduction in pension savings overall. As the implementation of the changes is still several years away, it remains to be seen how companies and workers will respond to the new rules.