Chambers Wales South East, South West and Mid Partner Quantum Advisory is a leading pensions and employee benefits consultancy for small and medium sized schemes and employers. Following an announcement in the Autumn Budget, the firm shares its expertise on salary sacrifice for pensions contributions and what the upcoming changes will mean.
What is salary sacrifice?
Salary sacrifice for employee pension contributions is an agreement between an employee and their employer where the employer pays the employee’s pension contribution in addition to their own and the employee’s wage is adjusted to reflect this. The reduced salary means that both employers and employees are subject to lower National Insurance contributions.
Entering into a salary sacrifice arrangement is a more tax-efficient way to pay into a workplace pension and can increase employees’ take-home pay. As pension schemes are a vital aspect of employee financial wellbeing, optimising contribution methods like salary sacrifice can be a great way to support employee engagement and loyalty.
While the process of introducing and administering a salary sacrifice arrangement is relatively straightforward and requires minimal effort to initiate, it’s important that special care is taken with employee communication. Employers, with the support of pension and employee benefits consultancies, should help employees understand the system and the benefits to them so they can make an informed decision about joining a salary sacrifice arrangement.
What was announced in the Autumn Budget?
Following much speculation ahead of the Budget, the Chancellor confirmed that National Insurance will be charged on salary sacrifice pension contributions above £2,000 to both employees and employers from April 2029. This change is expected to raise £4bn to £5bn for the Treasury.
What does this mean for employers and employees?
Implementation will result in higher payroll costs for many employers, lower take-home pay for employees and depending on how the salary sacrifice scheme is set up, less pension contributions being paid into employees’ pension schemes.
The introduction of the new limit, coupled with the minimum wage increases and employer national insurance rises, will add additional pressure to employers. Employers are likely to look at ways of recuperating these extra costs, which could result in a reduction in employer pension contributions, less spend on non-pension employee benefits and lower future salary growth for employees. The silver lining is that these changes won’t come into effect until April 2029, providing time to explore creative solutions.
The limit on salary sacrifice contributions, in isolation, will for many employees make it less likely for them to contribute more to their pension and could potentially lead them to reduce what they contribute. This raises significant concerns about what retirement outcomes will look like for future retirees, something the government will need to address in the Pension Schemes Bill and Pensions Commission’s review.
Different employers will have varying employee profiles influencing how these changes will impact them and their employees. Quantum Advisory’s team takes the time to tailor bespoke pensions and employee benefits advice such as salary sacrifice to businesses and stays on top of industry changes to ensure compliance.
