Rumours are swirling that salary sacrifice arrangements for pensions could be in the firing line at the Autumn Budget.
Under current rules, employees can choose to give up part of their salary in return for higher employer pension contributions.
This is popular because pension contributions are not subject to Income Tax or National Insurance (NI) in the same way that salary payments are. Employers also save on NI, making it a win-win.
However, following April’s increase in employer NI rates, the attraction of these schemes has only grown.
Former pensions minister Sir Steve Webb has even suggested that changes are “firmly on the Treasury’s agenda”.
How might reforms work?
There are several levers the Chancellor could pull if they chose to restrict or scale back salary sacrifice:
- Capping the amount that can be sacrificed – This would mainly hit higher earners who use salary sacrifice to maximise pension contributions while minimising tax and NI exposure.
- Removing the NI exemption – If NI relief were removed, both employees and employers would face higher NI bills on sacrificed income, significantly reducing the tax efficiency of the scheme.
- Removing both NI and Income Tax relief – A more drastic move would be to treat sacrificed salary as taxable, with contributions made post-tax instead. This would essentially remove the tax advantages of the arrangement altogether.
The tax impact
Any tightening of these rules would have immediate tax consequences:
- Employees – They would pay more NI and possibly more Income Tax on the portion of their salary they currently sacrifice. This could erode take-home pay, particularly for middle-to-higher earners who rely on salary sacrifice as part of their tax planning.
- Employers – They could lose the NI savings currently enjoyed, increasing staffing costs at a time when many are already feeling pressure from higher wage bills and inflation.
Who would be most affected?
If we look at several of the scenarios outlined above these are the groups that could be hit hardest:
- Higher earners: They typically sacrifice larger portions of salary and could see a meaningful rise in their tax liability.
- Employers in sectors with generous pension packages: They could face higher payroll costs, potentially making them reconsider the benefits they offer.
For now, salary sacrifice remains an efficient tool for pension saving. But with HMRC research feeding speculation and the Treasury under pressure to raise revenue, it’s no surprise that these schemes are under scrutiny.
If changes do come, the impact will be felt not just in pensions but in higher Income Tax and National Insurance bills and that could alter the landscape of workplace benefits overnight.
We will be on hand leading up to the Autumn Budget and afterwards to address any of these changes for you, so please get in touch with your usual Seymour Taylor representative or contact us at enquiries@stca.co.uk or 01494 552100.