Rachel Reeves has announced plans to change salary sacrifice arrangements for pension contributions.
The chancellor stated that salary sacrifice into pension schemes is forecast to almost treble in cost, from £2.8 billion in 2016-17 to £8 billion by 2030-31, with the biggest benefits going to the pension contributions for higher earners and minimum wage employees excluded.
In the Autumn Budget, Reeves revealed that the government is capping the amount that can be sacrificed without paying NICs at £2,000 per employee from 2029.
Employees who contribute up to £2,000 into their pension each year via salary sacrifice can continue to benefit in full, but employee and employer NICs will be charged in the usual way on the amount above £2,000 for the minority of those who contribute above this.
The Treasury says that cap will mean that 74% of basic rate taxpayers, and their employers, currently using salary sacrifice will be unaffected by this change.
Mike Ambery, retirement savings director at Standard Life, said: “The Chancellor’s decision to cap salary sacrifice at £2,000 a year marks a significant shift in how people can save for retirement. Salary sacrifice has long been one of the most efficient ways for workers to boost pension contributions, so limiting it will inevitably increase costs and reduce take-home pay for many.
“The surprise today is that the changes will apply only to individual’s contributions and employer contributions will remain exempt from national insurance. While the change is significant it is less damaging than feared and potentially creates a number of options for people to maintain their level of saving. This will include negotiating higher employer pension contributions in return for lower pay although we will need to wait and see how this is implemented.
“This change will disproportionately affect private sector workers, as public sector schemes don’t usually use salary sacrifice. At a time when simplicity and engagement are critical to improving savings levels, adding complexity and reducing incentives risks undermining confidence in the system. It’s also vital that consideration is given to the timing of this change.
“The official papers highlight that no additional tax revenue is expected until 2029, pointing to a gradual implementation. In the meantime people will want to make use of arrangement to the full extent they’re able to.”
