Reports that the Treasury was targeting salary sacrifice pension arrangements proved well founded as the chancellor announced she would charge both employers and employees national insurance (NI) on contributions over £2,000 from 2029.
Given that individuals agree to divert some of their pay into their pension in order to lower NI payments, a benefit that employers share, charging NI threatens to drive a coach and horses through this long-standing form of tax planning.
Modelling by the Treasury suggests the measure could raise £4.8bn in 2029/30 falling to £2.6bn in the following year, a total of £7.4bn, although it admits this forecast is vulnerable to changes in employer and employee behaviour.
Rachel Reeves will hope the estimate is accurate as this provides a big chunk of the reductions in government borrowing she hopes to achieve. The mooted £4.8bn saving from salary sacrifice in 2029/30, for example, is the second biggest measure after an £8bn freeze in personal tax thresholds which are expected to raise £26.1bn in taxes.
Even after £11.3bn of fresh spending decisions in that financial year, the bulk of them on increased welfare benefits, the Treasury is forecast to reduce the deficit by £14.8bn in 2029/30.
Jonathan Berger, employment tax director at Grant Thornton UK, said the government had given companies and workers time to prepare for the change, which was good as it threatened employers with higher costs and could lead to significant changes in pension saving behaviour by employees, particularly around auto-enrolment schemes.
“Middle earners, especially those earning under £50,000, will be particularly affected, paying 8% NI on contributions above the new threshold, while higher rate taxpayers will pay 2%.
“Employers face a greater impact, with a 15% NI rate on amounts sacrificed over £2,000,” he said.
Alasdair Mayes, partner at pensions consultant LCP, said: “We expect the cap on salary sacrifice for pensions will kill off bonus sacrifice for pensions. Bonuses are normally paid annually but NI applies on a pay period basis. The widely trailed £2,000 annual cap could become £167 per month for those paid monthly.”
“Allowing the first £2,000 sacrificed to still benefit from the NI savings will limit the impact on ‘ordinary working families’. However, an individual earning over £40,000 who sacrifices the auto-enrolment minimum 5% of their salary for pensions contributions will exceed the £2,000 cap – meaning many moderate earners will also be caught by this change,” he added.
Steve Webb, a former LibDem pensions minister who is now also a partner at LCP, said that as employers had time to restructure their pension plans there was a “high probability that this policy will only raise a fraction of the amount expected by the chancellor.”
