Autumn budget: Salary sacrifice pension changes and what they mean for employers and employees

We finally know (a little earlier than expected!) what is in the Autumn budget. As anticipated, the National Insurance Contribution (NIC) exemption for payments into pensions through a salary sacrifice has been capped.  From April 2029 any amount above £2,000 per annum that an employee puts into a salary sacrifice pension scheme will be subject to National Insurance Contributions (NICs). 

How salary sacrifice schemes currently work

Salary sacrifice schemes are a valued tax-efficient mechanism that allow employees to waive some of their pre-tax salary in return for receiving another benefit. This allows the employee to save on income tax and both the employee and employer to save on NICs. Schemes are often used to attract and retain talent by enhancing employee benefits packages. A few employers use their NIC savings to fund the cost of running their pension schemes or pay the savings as an additional top up payment to employees as a benefit, but the majority simply absorb the saving.

What does the cap mean in practice

Following this announcement an employee earning £40,000 who sacrifices 5% of their salary (£2,000) for pension contributions would be unaffected. However, higher earners or those with sacrificing a higher percentage of their salary will be impacted. A higher earner on £115,000 sacrificing £20,000 to a pension, to bring the taxable income below £100,000 (a common tax planning strategy) would now face an additional £360 deduction for employee NICs each year and the employer’s annual NIC bill would rise by around £2,700.

Impact on employers and employees

As a result of today’s announcement salary sacrifice schemes may now be less attractive to both employees and employers. However, before you consider making any changes you should seek tailored tax and legal advice to ensure you do not encounter unexpected consequences. We have time before the changes to prepare and to do so you should:

• Seek tailored independent tax and legal advice and ensure any changes meet HMRC compliance requirements.
• Engage with your payroll provider.
• Check your pension scheme rules and take specialist advice to understand the process of changing these.   For trust-based pensions schemes this may require trustee approval.  You will need to comply with auto-enrolment obligations and employees should not be required to stay in a salary sacrifice scheme to remain auto enrolled in your pension scheme. Changes that affect pensions may also require consultation for minimum periods with active and prospective scheme members and their representatives in certain circumstances.
• If you are planning to vary your employees’ contracts of employment, you will need to seek their agreement, which must be in place before any changes take place. You should consult with your employees, be clear and transparent about what is proposed and why, and clearly communicate the implications of any change to your employees.  You may wish to provide them with FAQs and the opportunity to get their own independent advice. 
• Importantly, if the changes affect more than 20 employees, and you may consider dismissing those who do not agree, collective consultation obligations will be triggered. These involve specific timescales for consultation and additional obligations, so it is essential that you reach out for specialist legal advice before taking any steps. Failure to comply with these obligations can lead to claims of 90 days pay per employee (which will be increased to 180 days under the Employment Rights Bill) so you should have a full understanding of the legal framework and risks associated with that approach before taking these steps.
• Finally, ensure you amend your template employment agreements, pension policies and associated documents.

Boyes Turner can provide you with expert guidance along with all the documentation you might need, please get in touch if we can assist you with this or any other employment law matters.