Pension tax break reduced by chancellor
Some pension savers will face a hit to the amount of money they can put into their pension without paying national insurance (NI) under measures announced in the Budget.
From 2029 there will be a cap of £2,000 per year that can be protected from employer and employee NI contributions using a method called salary sacrifice.
There is currently a much higher limit on the amount a worker can agree to pay with their employer, and the scheme is seen as a way to encourage workers to pay into their pensions.
The Office for Budget Responsibility (OBR) estimates the measure will raise £4.7bn from additional NI contributions in 2029.
Salary sacrifice allows employees and employers to agree an amount to be deducted from pay and transferred into the pension before the pay is affected by National Insurance Contributions (NICs) and income tax. Workers “sacrifice” a higher salary, but receive a tax-free amount in each paycheck.
Chancellor Rachel Reeves said the current system favored high-income earners and those working in financial services, who “can put their premiums into a pension tax-free”.
Reeves said the £2,000 cap on pay deductions was a “pragmatic step” and meant people on low and middle incomes could continue to use the scheme “without paying more tax”.
The salary sacrifice policy also reduces the total amount of employer National Insurance Contributions (NIC) paid by companies; so any cap would mean a higher NIC bill for companies or a rethink on whether to offer the bonus.
The cap will mean that salary sacrifice contributions above £2,000 will be subject to NICS for both staff and companies. Workers paying basic rate income tax will pay 8% into NICS, while higher rate taxpayers will pay 2%. Employers pay 15% into NICs.
Nearly a third of private sector workers and a tenth of public sector workers use a salary sacrifice scheme for retirement savings. Analysis by HM Revenues & Customs suggested around 7.7 million workers would use it by 2024.
Former pensions minister Steve Webb, who is now a partner at LCP, said there are more than three years left before National Insurance payments are due due to salary sacrifice, meaning the Chancellor is unlikely to raise the £4.7bn over the OBR’s forecasts.
“The decision not to implement this change until 2029 creates a huge opportunity for firms to restructure the way they offer salaries and pensions to mitigate or eliminate this new charge,” Mr Webb said.
“There is a good chance this policy will raise only a fraction of the amount the chancellor expects.”
Baroness Ros Altmann, also a former pensions minister, said the current pay sacrifice system was “transparent” because it was based on agreements between individual companies and workers to reduce tax liabilities, but the proposed changes would “add to this”.
“There will be extra National Insurance costs for employers, there will be potentially lower wages and then there will be administrative costs of any changes to pension policy.
“Employers may not think the administrative costs of changing this are worth it and throw the whole thing away,” he added.
“Overall, I would say this is a net negative for the UK to save more.”
