3.3m pension savers facing hit with salary sacrifice changes

Around 3.3 million pension savers are on course to be clobbered by salary sacrifice changes announced in the Budget, HM Revenue and Customs (HMRC) figures indicate.

Guidance published online by HMRC about the changes said an estimated 7.7 million employees currently use salary sacrifice to make pension contributions.

Of these, 3.3 million sacrifice more than £2,000 of salary or bonuses.

Changes announced in the Budget will mean salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from national insurance (NI) from April 2029.

Contributions above £2,000 will be treated as ordinary employee pension contributions in the tax system and subject to NI contributions.

Employers may offer salary sacrifice as part of their pension scheme as a tax-efficient way to help workers boost their pots.

The schemes enable people to maintain their take-home pay, as people end up paying lower NI contributions.

The announcement in the Budget has been criticised by pensions industry bodies, who have argued many people are already thought to be heading for a tough time financially in later life.

Yvonne Braun, director of policy, long-term savings, health and protection at the Association of British Insurers (ABI), previously said “the wider work required to rebuild people’s trust in the stability of pensions will take years”.

People often dial their pension contributions up and down throughout their working lives, depending on factors such as their other financial commitments and outgoings, and how close they are to retirement.

The HMRC guidance said employees with salary sacrifice contributions are estimated to be of typical working age.

It said: “In particular, those who are aged 31 to 50 (52%) are estimated to be overrepresented compared to their prevalence in the employee population in general (44%).

“Males are also estimated to be overrepresented in the population making salary sacrifice pension contributions (59%) compared to their prevalence in the UK adult population (50%).”

The document also said: “This measure is expected to have an impact on 290,000 employers who operate salary sacrifice arrangements for pension contributions who will now need to account for relevant pension contribution amounts and report and pay class one national insurance contributions on these, where appropriate.

“One-off costs will include familiarisation with the change, the training of staff and updating of software. Continuing costs will include performing more calculations and recording and providing additional information to HMRC where salary sacrifice schemes continue to be used.”

Looking at other operational impacts, the document said: “HMRC will need to make IT changes to support implementation of this measure. These changes are expected to cost in the region of £1.9 million.”

The document also said: “Salary sacrifice for pensions contributions remains, and its cost as a relief has increased markedly from £2.8 billion in forgone national insurance contributions in tax year 2016 to 2017, rising to £5.8 billion in tax year 2023 to 2024.

“Were no changes made, it is expected that this would nearly triple to £8 billion by tax year 2030 to 2031.”

Sir Steve Webb, a former pensions minister who is now a partner at consultants Lane Clark & Peacock, said the impacts on employees could be wider if employers respond to the changes by making pension provision less generous for all workers.

Sir Steve said: “A Budget measure that was largely seen as complex and technical could have significant real-world implications for millions of workers.

“At a time when the nation as a whole has a significant ‘under-saving’ problem, this change will make matters worse.

“On the Government’s own estimates, around three in seven of the workers who use salary sacrifice to pay into their pensions will be hit by the change, whilst employers will face a bigger hit because of their higher rate of national insurance contributions.

“Although employers have time between now and 2029 to consider their options, there is a risk that some will simply cut back on the generosity of their workplace pension offering, which would be a serious backward step.”