The Government has targeted the savings from salary sacrifice that millions of employees currently take advantage of to lower the cost of saving for their retirement. From April 2029, both employer and employee National Insurance Contributions (NICs) will apply to salary-sacrificed pension contributions above £2,000 per year. This change ends the long-standing NIC exemption that made salary sacrifice one of the most efficient ways to save for retirement.
What’s changing?
Currently, employees and employers enjoy full NIC relief on any amount sacrificed into pensions (subject to any annual allowance and National Minimum Wage restrictions).
From April 2029, based on current NIC rates and thresholds:
- employees earning under £50,270 will pay 8% NICs on contributions above £2,000 each tax year, while those earnings above the threshold will pay 2% on the excess
- employers will face 15% NICs on amounts their employees sacrifice over £2,000 (based on current rates)
- employees will still be able to sacrifice more than £2,000, but the NIC will be calculated on the excess as if it were earnings.
This measure is expected to raise £4.7 billion in 2029-30 and £2.6 billion in 2030-31, according to the Office for Budget Responsibility (OBR), although given the time until its introduction, some commentators have questioned these assumptions, on the basis that employers can change their strategy now in order to avoid some of the additional costs.
Why does it matter?
Salary sacrifice has been a cornerstone of workplace-pension strategy, boosting take-home pay and encouraging higher contributions. Research published prior to the Budget suggested that 38% of workers would save less into pensions if salary sacrifice benefits were capped.
Limiting NIC relief could increase employer costs significantly, especially for businesses that encourage higher pension saving. It could also see employers reduce any pension contributions they currently make above the minimum levels, shifting to a less generous basis. Furthermore, many employers that use salary sacrifice currently pass some or all of their NIC savings back to employees as enhanced contributions, while others use the savings to bolster other offerings for employees, an approach that will likely now need to be reviewed.
Employees who see their take home pay reduced due to the additional NICs may choose to reduce any additional voluntary contribution they're making to maintain the level of their take-home pay, undermining the success of auto-enrolment, which has brought over 22 million people into workplace pensions since 2012.
It’s been long-accepted that the 8% minimum contribution required under the auto-enrolment rules won’t be sufficient, and many in the pension industry have been lobbying for this level to be increased. There seems to be little chance therefore of any positive moves in this regard and, if anything, employers and employees are more likely to take a backwards step.
The practical impact
For employers, the additional NIC liability could be substantial. For example, take the case of an employee age 50 with a £40,000 salary, trying to make up a potential pension income shortfall before they retire by sacrificing £5,000 per year into their company pension-scheme. Their £5,000 sacrifice is due to trigger NIC on £3,000 of that amount, costing the employer an additional £450 and the employee £240 per year in NICs at current rates.
Larger firms with generous pension schemes could see significant annual increases in payroll costs. The OBR assumes 76% of these costs will be passed to employees, either through lower salaries or reduced employer contributions.
Bonus sacrifice, a technique commonly used to redirect bonuses into a pension to boost long-term saving and benefit from the favourable NIC treatment, will become unviable in most situations.
What should employers do now?
The delayed implementation gives businesses time to prepare. Key steps include:
- model the cost impact: understand how much the change will add to your NIC liabilities
- review pension scheme design: consider alternative contribution and reward structures
- explore offsetting strategies: savings from benefit redesign, premium renegotiation, or scheme consolidation could help
- prioritise valued benefits: identify which perks matter most to employees if cost reductions are necessary
- plan communications: clear messaging will be vital to maintain trust and engagement both in relation to existing pension salary sacrifice arrangements as well as future plans.
We can support you to quantify the financial impact of the NIC change, restructuring pension scheme and salary sacrifice arrangements so that they remain compliant and cost-effective. With effective planning, communication and consultation some employers could, for example, look to shift to a fully employer-funded pension arrangement for the whole workforce over the next few years to help avoid the impact of the change.
We can help identify savings elsewhere in your benefits portfolio and communicate any changes effectively to employees, ensuring they understand the reasons behind any change to their take-home pay, and the wider value of your employee benefits.
The key message is 'don’t wait until 2029; start planning now'. Get in touch with Laurie Eggleston to schedule a strategic review and ensure your business is ready for one of the most significant pension reforms in a decade.
