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The government will curtail the tax advantages of salary sacrifice arrangements involving employer pension contributions from April 2029, and only for contributions above £2,000 per year.
From April 2029, only the first £2,000 of salary sacrificed pension contributions each year will be exempt from NICs, with contributions above £2,000 subject to employer and employee NICs.
There will be no restriction on the amount that can be contributed to pension salary sacrifice arrangements, and – for contributions above £2,000 – the same tax treatment will apply as when an employee makes pension contributions personally.
Pension contributions mean a reduction to the amount of income tax payable by the employee, and a reduction to taxable profits for the employer – saving corporation tax.
Salary sacrifice is particularly beneficial for an employee who is paying income tax at an effective rate of 60% due to being caught in the personal allowance trap (where income falls between £100,000 and £125,140). Salary sacrificed pension contributions above £2,000 will still reduce this 60% liability.
Rather than sacrificing salary, bonuses are often redirected into a pension under a sacrifice arrangement. Such bonus sacrifice will also be caught by the changes.
The changes are over three years away but the impact could be considerable, so employers need to start planning.
Some may decide to keep salary sacrifice arrangements in place and accept the increased NICs cost and administrative hassle. Others may decide to simply stop offering pension contributions under salary sacrifice, although this will disproportionally impact lower-paid employees who lose out on the main rate NICs saving.
Ordinary (non-salary sacrificed) employer pension contributions will continue to be exempt from NICs, so it might be possible to replicate the NICs advantage of salary sacrifice by restricting future salary growth and instead providing employees with higher ordinary pension contributions.
