The salary sacrifice scheme allows employees to exchange part of their salary in return for employer contributions to their pension schemes, which can result in both tax and NI savings. But the government’s decision to impose limits on this tax-relief mechanism may now undermine the advantages it once offered, leaving many workers with less to retire on and forcing employers to rethink their contributions.
How the Salary Sacrifice Cut Will Impact Workers
According to pension experts, the cut could lead to lower pension savings and reduced disposable income for workers. Under the new rules, employees will have to pay National Insurance contributions on any pension contributions above the £2,000 annual limit. The effects will vary depending on individual and employer contribution rates.
For example, an employee earning £40,000 annually, with an 8% pension contribution (5% from the employee and 3% from the employer), could see their take-home pay reduced if their total pension contributions exceed £2,000. If workers are contributing more than the minimum required amount, the salary sacrifice scheme will no longer deliver the same tax benefits, leading to a potential reduction in their overall pension pot. Higher earners or those contributing above the statutory minimum will be most affected, with many workers now at risk of saving less for their retirement.
While the government’s intent is to curb excessive tax breaks, critics argue that the policy fails to account for the long-term consequences for pensioners. Employers who cannot afford the additional costs are likely to grant lower pay rises, reduce other staff benefits, or hire fewer workers. Ros Altmann, former Pensions Minister, warned in an interview with This Is Money that the limit could ultimately result in a reduction in retirement income for many workers, particularly those who are already contributing above the minimum.
Rising Costs and Administrative Burdens for Employers
Employers, particularly small businesses, will also face significant financial strain as they adapt to the new policy. According to Altmann, the shift in the salary sacrifice rules will result in increased costs for businesses, which will now be liable for NI contributions on pensions exceeding the £2,000 limit. This will create additional burdens for employers, who may have to alter their payroll systems, pension schemes, and internal communications to comply with the changes.
For many employers, the reform will lead to rising operational costs. Small businesses, in particular, may struggle with the administrative complexities, as they typically have fewer resources to manage the new requirements. Many will need to hire additional staff or outsourcing services to cope with the increased workload. The reform may also force companies to reduce pension contributions or scale back other benefits to mitigate the financial impact, according to industry analysts.
