The Government has announced significant reforms to salary sacrifice arrangements for pension contributions, set to take effect from April 2029.
What are Salary Sacrifice pension contributions?
Salary sacrifice has long been a tax-efficient vehicle for employees, allowing them to redirect part of their salary into their pension scheme free of both income tax and National Insurance (NI).
This differs from personal pension contributions, which are made from an employee’s post-tax and post-NI income. While personal contributions benefit from:
- Basic rate tax relief via government top-ups, and
- Higher-rate relief through an extension of tax bands,
they do not attract NI relief. Salary sacrifice has therefore been particularly attractive, especially for higher earners.
What’s changing?
From 2029, a cap of £2,000 per year will apply to salary sacrifice pension contributions.
- The first £2,000 will continue to enjoy full tax and NI relief.
- Any contributions above this threshold will be treated as normal personal pension contributions, meaning NI will be payable by both the employee and employer on the excess.
Example 1 – £40,000 of Employment Income
Pre‑2029 (Current Rules)
- Entire £2,000 contributed via salary sacrifice.
- Fully exempt from both income tax and NI.
- Employee and employer enjoy maximum efficiency.
Post‑2029 (New Rules)
- Contribution of £2,000 sits exactly at the cap.
- Entire amount remains exempt from tax and NI.
- No change in cost for either employee or employer.
Conclusion: £0 additional cost
Example 2 – £100,000 of Employment Income
Pre‑2029 (Current Rules)
- Entire £5,000 contributed via salary sacrifice.
- Fully exempt from both income tax and NI.
- Employee and employer avoid NI on the full amount.
Post‑2029 (New Rules)
- First £2,000: tax & NI exempt
- Next £3,000: treated as pension contribution
NI on £3,000 excess
- Employee: 2% = £60 (above UEL)
- Employer: 15% = £450
Conclusion: £510 additional cost
This indicates that although the employer bears most of the additional cost, employees may feel its impact through reduced remuneration. However note that the business will get tax relief on the additional NI.
Although this is a significant change, it will not take effect until April 2029, giving individuals and employers time to adjust their pension strategies.
If you have any questions about how the budget might affect you, do get in touch on 01242 776000 or tax@randall-payne.co.uk.
