The Government defended its announcement by stating that, without reform, the costs of national insurance contribution relief on pensions salary sacrifice were set to increase from £2.8 billion in 2016-17 to £8 billion by 2030-31. It also highlighted that the use of salary and bonus sacrifice arrangements has disproportionately benefited higher earners. The £2,000 per annum cap is expected to shield 74% of basic rate taxpayers who currently use salary sacrifice.
This tax change will mean that, after April 2029, any salary sacrificed pensions contributions over £2,000 will effectively be treated like ‘normal’ employee pension contributions. ‘Normal’ employee pension contributions are subject to both employer and employee national insurance contributions. Consequently, individuals who are sacrificing more than the £2,000 cap would need to reduce pension contributions to maintain net take-home pay. As for employers operating a salary sacrifice arrangement, they will need to deal with additional complexity in the payroll function as well as increased costs.
Not all employees can benefit from salary sacrifice. The arrangement needs to be operated by the employer and it is not available to employees earning up to the minimum wage.
How will savers react?
Early research by Pensions UK revealed that, whilst many savers did not expect to make any change to their pension contributions, already 11% anticipate reducing contributions once the changes take effect, with 3% even reducing them before 2029. Many savers are looking again at alternative forms of long-term savings such as ISAs to receive pay that would previously have been sacrificed.
It is still early days, though, and since the change is not due until April 2029, it will take a while for any clear patterns to emerge.
To save or not to save?
According to a recent report from the Society of Pension Professionals, around a third of private sector employees currently make use of salary sacrifice arrangements, and almost 10% of public sector workers do so. That translates to around 3.3 million people currently using salary sacrifice for pensions who are expected to be affected by the cap, including around 850,000 basic rate taxpayers. That amounts to a lot of decisions to be made on how to respond to the change as April 2029 comes into view and details become clearer.
The planned change does seem to illustrate some contradictory messaging from the Government. While on the one hand the Government is committed to improving pension outcomes, the cap on national insurance contribution relief via salary sacrifice can only lead to lower pension saving in the long run for many. This may particularly effect middle income earners rather than higher earners as the main rate of employee national insurance contributions for employees reduces to 2% on income above £50,270 per annum.
It is certainly welcome that the mooted full abolition of national insurance contribution relief on pensions salary sacrifice wasn’t announced, even if it was ever seriously considered. But the move does highlight a tendency for Government to look to taxing pensions more when trying to balance the books, rather than setting a long-term stable policy that will encourage pensions saving.
What should savers and employers consider doing now?
Whilst there is a natural logic to delay any longer-term planning until the run-up to April 2029, advantage could still be gained from early consideration. For example:
- Where permitted by their existing salary sacrifice scheme and personal affordability, individuals may wish to increase temporarily their level of pension contributions to take advantage of the current uncapped position.
- Employers may therefore wish to review current salary sacrifice arrangements and communicate with staff accordingly.
- Employers may decide to plan a wider review of their compensation strategies to reflect or counter the potential post-2029 impacts such as offering lower salary increases in exchange for additional employer pension contributions (which do not attract national insurance contributions).
- Alternatively, employers may possibly seek to reduce employer pension contributions in 2029 to offset an increase in employer national insurance contributions payable as a consequence of the element of pay that will no longer be sacrificed, or if the employer was previously sharing the saving in national insurance contributions with the employee, as this saving will disappear.
Employers will gain from starting now to consider the short and long-term impacts while monitoring the progress of the legislation and the detailed Government guidance that is expected in due course.
Duncan Ross, Scheme Actuary – Hughes Price Walker
