- The National Insurance (NI) savings of salary sacrifice for pension contributions will be capped at £2,000 per year from April 2029
- Charging employees NI on pension contributions above the cap will reduce take home pay
- Employers will bear the brunt of a 15% NI charge on excess contributions
- Pension savers will still obtain income tax relief on what they pay into their pensions
- How paying into a pension can help you reduce your tax bill and avoid tax trap
Charlene Young, senior pensions and savings expert at AJ Bell, comments:
“Rather than an all-out ban on using salary sacrifice for pension contributions, a £2,000 cap announced by the chancellor today will be placed on the amount of earnings given up that will benefit from a National Insurance (NI) exemption from April 2029.
“The move is expected to raise £4.7 billion in 2029-30, which neatly avoids Labour breaking its manifesto pledge not to raise taxes on working people. Nevertheless, many working people will see less in their pay packets, with the biggest impact clustering at the £45,000 to £50,000 band.
“Employers using the schemes will be forced to foot a second consecutive tax raising Budget. While salary sacrifice currently helps workers save up to 8% employee National Insurance (NI) on the cost of their pension contributions, the savings on offer are bigger for employers. There is no upper threshold for employer NI, so they will face a 15% charge on the full value of sacrificed contributions over the £2,000 cap. Some generous employers have previously rewarded employees by sharing all or some of their saving, but it’s likely the added costs to payroll will lead to reward schemes being watered down or withdrawn.
The impact of another stealth tax rise
“The below table shows the impact on employee pay packets and the extra NI bill to employers per year, assuming the employee has agreed to exchange 6% of their notional salary for a pension contribution, with a 6% employer match.
Source: AJ Bell. Figures based on when the changes come into effect in 2029.
Using pension contributions to avoid tax traps
“Despite the NI savings being capped, pension contributions will still be exempt from income tax and workers can still enjoy pension tax relief up to their marginal rate of income tax. More so, making pension contributions to schemes like SIPPs will still reduce a taxpayer’s ‘adjusted net income’, pulling them out of higher rate tax or one of the many punishing tax traps while also boosting their retirement savings.
“For example, someone with an adjusted net income of £60,000 or more will start to see any child benefit clawed back and someone breaching the £100,000 limit starts to lose their tax-free personal allowance for the year. In both cases, their extra earnings face an effective tax rate of 62% if you include NI.
“But pension contributions can reduce adjusted net income back down under these thresholds as the gross value of the pension contribution can be deducted from ‘adjusted net income’. This could mean tax relief of up 62% on the money paid in if you can claw back child benefit or personal allowance, or even more if you consider the cliff edge for parents of young children. Families where one person has income over £100,000 also lose their entitlement to tax-free childcare and extra funded childcare hours.
“Rather than making a formal arrangement to keep their salary below a certain level, workers will need to work out what extra contributions they need to make to reduce their ‘adjusted net income’. This will involve a little bit of extra admin but will still be well worth it when you consider the potential tax savings on offer.”
