Salary sacrifice pension changes ‘could see people on modest incomes losing out’
From 2029, salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from national insurance contributions.
Concerns that plans to restrict rules around salary sacrifice schemes for pensions could hit workers on only modest incomes have been raised, following the publication of new analysis.
From April 2029, salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from national insurance contributions (NICs).
Employers may offer salary sacrifice as part of their pension scheme as a tax-efficient way to help workers boost their pots.
The schemes enable people to maintain their take-home pay, as people end up paying lower national insurance contributions.
The changes, announced in the budget, mean salary-sacrificed pension contributions above £2,000 will be treated as ordinary employee pension contributions in the tax system and will be subject to employer and employee national insurance contributions.
Figures released by HM Revenue and Customs (HMRC) in December indicated around 3.3 million pension savers were directly on course to be hit.
HMRC has said an estimated 7.7 million employees use salary sacrifice to make pension contributions – and of these, 3.3 million sacrifice more than £2,000 of salary or bonuses.
On Thursday, Sir Steve Webb, a former Liberal Democrat pensions minister, highlighted a new document published by the the Office for Budget Responsibility (OBR), which he said indicated that many workers sacrificing less than £2,000 could also lose out.
The OBR document said that the behavioural response to the measure was “highly uncertain, given the various channels through which employers and employees can respond”.
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Sir Steve, who is now a partner at consultants LCP (Lane Clark & Peacock), said: “Far from ordinary workers being ‘protected’ from the changes, we could see millions of people on modest incomes losing out as well, further undermining their incentive to save in a pension.
“We urgently need the Government to be clear about the true scale of the losses from this policy.”
Sir Steve highlighted concerns that some workers who pay less than £2,000 could lose because of lower future pay rises or a lower contractual salary.
The OBR document said that: “Employers could look to formalise salary sacrifice arrangements to replicate the tax benefits of salary sacrifice by increasing contributions in place of wage growth or lowering contractual salary in exchange for higher employer contributions.”
The document highlighted “pass through”, with an assumption that a portion of some of the cost to employers would be passed on. This could be through how they paid pension contributions, salaries, or bonuses, for example.
Some employers could end salary sacrifice schemes, which would affect the workforce generally.
Sir Steve said: “The budget change to salary sacrifice rules around pensions was a huge measure which will cause employers to rethink their pay and pensions policies.
“The independent OBR shows very clearly that there are a range of ways in which employers will respond which will affect the wider workforce and not just those contributing over £2,000 via salary sacrifice.”
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