Changes to Salary Sacrifice

It was announced during the Budget in November that the National Insurance saving on employee pension contributions made via salary sacrifice would be capped. This change is scheduled to take place in April 2029. 

Pension salary sacrifice is an agreement between an employer and their employee. Under this arrangement, the employee agrees to a reduction in their salary that is equal to the amount they contribute to their pension, in return for an employer contribution which is typically of equal value. 

From April 2029, the pension contribution amount that is exempt from National Insurance will be capped at £2,000 a year for employee pension contributions made via salary sacrifice. As a result, the maximum National Insurance saving from salary sacrifice will be: 

• Employers: 15% of £2,000 = £300 pa.
• Employees: 8% of £2,000 = £160 pa. 

If we revisit our earlier example with the individual earning £28,000 a year, they will not be affected by the changes in April 2029, as their pension contribution of £1,400 falls below the £2,000 cap. 

On the other hand, an individual contributing £2,400 a year into their pension will only benefit from a National Insurance saving on the first £2,000. Employer and employee National Insurance will be applied to the remaining £400. Income Tax relief will still be applied to the full contribution.

For clarity, this cap only applies to pension contributions funded by the employee via salary sacrifice. Contributions funded by the employer will continue to be free from employer National Insurance.

Consider an employee earning £28,000 a year gross is contributing 5% of this into their pension. 

• This equates to a pension contribution of £1,400 each year.
• Their employer is paying a 3% pension contribution of £840.
• Without salary sacrifice in place, both employer and employee National Insurance contributions (NICs) are based on this employee’s gross salary of £28,000.
• Under a salary sacrifice arrangement however, £1,400 is deducted from this employee’s salary, and the employer instead makes an additional pension contribution of £1,400.
• So the employer’s total pension contribution will be £2,240 (£840 + £1,400), and the employee’s pension contribution is reduced to £0.
• This means that the employee’s gross salary has effectively been reduced by £1,400 to £26,600.
• Consequently, employer and employee NICs will be based on £26,600 rather than £28,000.
• This results in a National Insurance saving of £210 per year for the employer, and a saving of £112 per year for the employee. The employee NI saving can either be used to increase the employee’s take home pay, or it can boost their pension contribution. 

Once the cap is in place, it could discourage individuals from making pension contributions above the £2,000 cap each year, which would have a negative impact on future retirement savings. However, despite the proposed changes, individuals should keep in mind that the Income Tax relief on contributions will still make pensions an attractive, tax-efficient, long-term savings option.

The table below illustrates the impact on pension pots, with those earning over £50,000 impacted most significantly. Over a twenty-year period, an employee will find their pension pot £7,061 worse off when the rules on salary sacrifice change in 2029. Compare this with an employee earning £25,000, who will be £93 worse off. Those earning £95,000 will find their pension pots reduced by £22,963 over a twenty-year period.

The table above includes the impact on both employee and employer national insurance contributions. Based on 5% pension pot growth, 2% inflation and 3% wage growth. Assumes National Insurance bands remain frozen for 2029- 10 PROSPERITY NEWSLETTER CHANGES TO SALARY SACRIFICE 30 and 2030-31, then start to rise in line with inflation. 

There is also a possibility that pension salary sacrifice will see a surge in popularity, as employers and employees will want to make the most of the available National Insurance saving before the cap is imposed in April 2029. 

I’m here to help! I am the Workplace Benefits Consultant at Albert Goodman, and I’m happy to answer any questions you have regarding salary sacrifice, how to put it in place, and how the associated tax savings could benefit your business.

'The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. This article is for information only and does not constitute advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.'