The government’s plans to adjust salary sacrifice pension schemes have sparked concerns that millions of low-income workers may face an unexpected financial burden. From April 2029, changes to National Insurance Contributions (NICs) could reduce the benefits of pension schemes for those who rely on salary sacrifice arrangements. Experts warn that workers on modest incomes could be disproportionately affected.
Salary sacrifice is a popular tax-efficient method of boosting pension savings. By sacrificing a portion of their salary in exchange for additional pension contributions, employees can lower their National Insurance contributions and keep more of their take-home pay. However, upcoming changes to the system could undermine these benefits, particularly for lower-paid workers, raising questions about the wider implications for pension savings in the UK.
Changes to Salary Sacrifice Rules Could Have a Far-Reaching Impact
The most significant change, which will come into effect in April 2029, involves the £2,000 threshold for salary-sacrificed pension contributions. According to a December report from HM Revenue and Customs (HMRC), around 3.3 million pension savers currently exceed this threshold. For those individuals, salary-sacrificed pension contributions above £2,000 will no longer be exempt from National Insurance Contributions (NICs). Instead, they will be treated as standard employee pension contributions and subjected to both employer and employee NICs.
This change has raised alarm bells among experts. Sir Steve Webb, a former pensions minister, warned that many workers who earn modest salaries could face financial difficulties. In a new report, he highlighted that although the changes were aimed at higher earners, the effects could ripple down to those on lower incomes as well. “We could see millions of people on modest incomes losing out,” Sir Steve said, noting that the changes could discourage pension savings for a large portion of the workforce.
The Office for Budget Responsibility (OBR) has also raised concerns, suggesting that the impact of the changes is still unclear, especially when considering how employers might adjust to the new rules. Some companies may scale back salary sacrifice arrangements altogether, passing the burden onto their employees. The OBR’s report underlines that such changes could affect a far broader group of workers than initially expected, with possible consequences for pension savings across all income levels.
Widespread Business Impact and Administrative Challenges
The impact of the salary sacrifice changes is not limited to individual workers but extends to businesses as well. According to Daniel Gallon, head of taxation at the Association of British Insurers (ABI), the majority of businesses anticipate significant disruptions. A survey conducted by the ABI and the Reward and Employee Benefits Association (Reba) revealed that 99% of businesses expect to be impacted by the new cap on salary sacrifice. Many businesses are bracing for increased administrative burdens, which could strain resources and affect the way pension contributions are managed.
The financial consequences of the new rules could also reach beyond just salary sacrifice schemes. Employers might face pressure to make changes to pay and pension policies to mitigate the effects of the new NICs treatment, such as freezing salary increases or reducing bonuses. These actions could undermine employee trust and complicate pension planning, especially for employees who may already be financially stretched.
The government’s decision to adjust the salary sacrifice rules has prompted experts to call for a clearer understanding of the potential fallout. While the changes are intended to simplify the tax system, they could inadvertently discourage pension savings, particularly for those who need it most.
