Ahead of the Budget, it was widely rumoured that the Government would introduce a change to pension salary sacrifice. This article was originally published based on rumours circulating ahead of the Budget; it has now been updated with what we know.
The change
The savings that employees and employers can make from pension salary sacrifice will be capped from 6th April 2029 by an amendment to national insurance contributions (“NIC”) legislation. Legislation is to be drafted, and it is assumed the Government will allow the usual consultation from relevant stakeholders to ensure that there are no unintended consequences.
The savings will be capped on £2,000 worth of “employee pension contributions” per tax year per employee. This means, from April 2029:
- The maximum saving an employer can make is capped at £300 per employee per tax year.
- The savings employees can make will depend on their specific circumstances, but typically the maximum saving will be £160 per tax year, assuming national insurance contribution rates remain the same in the future.
For those of you unfamiliar with pension salary sacrifice, here’s an earlier article.
For those familiar with the topic, please read on to understand the potential implications.
Why £2,000 per tax year?
This is “hypothetical scenario 3” in a government research paper commissioned and published earlier this year.
If you have a pension salary sacrifice in place, what does this mean for you?
It depends on your definition of pensionable pay.
For example, if your pensionable pay definition is based on qualifying earnings thresholds, then an individual’s pension contribution is capped based on the lower and upper limits. Assuming the employee contribution is 5%, then under this pensionable pay definition, it would impact employees with earnings greater than £46,240.
For other pensionable pay definitions, the salary level would most likely be lower than this. For example, if the pensionable pay definition is all earnings and assuming 5% employee contributions, then it would impact employees with earnings greater than £40,000.
Where an employee is impacted, this will mean:
- They pay national insurance contributions on every £1 of contribution above £2,000 per tax year. Assuming employee NIC rates remain the same, it would either be an 8% or 2% charge on these contributions for the employee, depending on the other taxable income from their employer.
- An employer will be charged 15% on every contribution the employee makes above £2,000.
To be clear, this is just where a pension salary sacrifice is operated. Where the employee sacrifices an amount in exchange for an employer pension contribution, that sacrifice reduces their pay, subject to National Insurance.
If pension salary sacrifice is not operated, the employee does NOT obtain any NIC relief; they only obtain income tax relief. Therefore, it is still beneficial to run a pension salary sacrifice arrangement. So, there will still be some benefit for both the employee and employer of running a pension salary sacrifice; we’re just saying they wouldn’t be as beneficial as they are now.
How the government will monitor compliance with such a change in the future will be interesting. Clearly, real-time payroll information submissions will easily highlight to them if someone hasn’t operated NIC, but will they enact more far-reaching legislation to prevent contractual changes that wouldn’t show on the payslip? If they don’t, then how would they look at such changes? Will it be considered a perceived abuse of the intention of the legislation? We all await the draft legislation to see how this complexity will be addressed.
What is clear is that it will be a nightmare adjusting payroll software to account for such a change, as the £2,000 doesn’t align with pension auto-enrolment legislation and will depend on variables such as additional voluntary contributions, multiple employment, etc.
If I operate a pension salary sacrifice, what action may I want to undertake?
1. Check how the pension salary sacrifice was implemented as:
- The way it is communicated and issued to employees will depend on how your business needs to communicate with staff now and ahead of April 2029.
- For example, did you issue a new contract or make a change to the terms and conditions? Did you implement on an opt-in or opt-out basis? etc
2. Check your definition of pensionable pay, as this will determine which employees will be impacted from April 2029.
3. Check what the deemed employee contribution % is:
- Check if any individuals make additional voluntary contributions.
- Check if different terms were agreed due to TUPE/acquisition terms etc.
- Check if different terms are in place across employee groups due to personal arrangements, e.g. did you agree to contribute to a registered personal pension scheme instead?
- What about bonuses? Does anyone waive their entitlement for an additional employer pension contribution? is this a one-off or regular amount?
- What about employees who have more than 1 employment within the group? This is something we hope will be clarified by the draft legislation.
4. Modelling the cost impact will be required, but it may be more beneficial to focus on the productivity impact… less pay can mean lower motivation; how do you stop the double whammy? Instead, do you think about:
- How can we increase time efficiency gains?
- Investment in enhancing services or creating new services/products?
- Cost is cost, and it can’t always be passed onto the customer; service delivery will remain a focus to remain competitive in the market.
- Ideas win, but planning will become more key to ensure that “that great idea” leads to revenue generation (or cost reduction)
5. Understand the interaction with the National Minimum Wage increases from April 2026. Which employees can no longer participate in pension salary from April 26, or how much will need to be paid to ensure compliance with the National Minimum Wage?
6. New employees: do you offer the same terms, or create a different reward package?
If you don’t have a pension salary sacrifice in place, is it still worthwhile to introduce one?
Yes.
There is still an opportunity for both the business and employees to save money if the arrangement is introduced. Every employee can still make a saving. The employer will still make a saving; it will just be capped.
What could the savings look like going forward?
The savings prior to April 2029 remain unchanged. If you would like more details on this, refer to the Pension salary sacrifice previous article or contact Kyle Newton.
The following outlines what savings will look like when the £2,000 cap on employee contributions is introduced. This assumes you have a workforce with an average salary of £30,000, and you operate a standard auto-enrolment scheme with 5% employee contributions and a qualifying earnings pensionable pay definition.
| Number of employees | Potential employer savings if pension salary sacrifice implemented (amounts rounded down to nearest £500) |
| 25 | £4,000 per year |
| 50 | £8,500 per year |
| 100 | £17,500 per year |
| 150 | £26,500 per year |
| 200 | £35,500 per year |
What would the savings be for an employee applying the same assumptions?
| Salary | Estimated annual savings for the employee |
| £30,000 | £95 per year |
| £35,000 | £115 per year |
| £40,000 | £135 per year |
| £46,240 | £160 per year |
| Above £46,240 | £160 per year – assuming the government caps relief to £2,000 employee contributions |
What happens next?
We await the publication of draft legislation, and following this, BHP will publish any additional comments and observations. Get in touch with Kyle Newton, Tax Partner, for more information.
