Don’t be scared by the headlines, there is still time to benefit from salary sacrifice

With impending changes to utilising salary sacrifice for pension contributions currently in the headlines, employers should not let this put them off from continuing, or setting up, this valuable employee benefit, according to the pension experts at Everywhen, backed by new research.

 The research carried out by Everywhen among companies of all sizes across the UK shows that

less than half (48%) of employers currently offer salary sacrifice for their pension contributions. With changes to the system coming in from 2029, employers should consider maximising the benefits of salary sacrifice while they still can, and start to plan for the new rules.

 Sorangi Shah, client director at Everywhen, says: “Utilising salary sacrifice for pension contributions is a great way for employees to maximise their investments. It is a simple way to significantly reduce income tax and National Insurance. This increases take-home pay for employees while still being able to make the same or greater payments into their pension.”

Employers also benefit from salary sacrifice through significant reductions in National Insurance costs. Everywhen’s research shows that these savings are kept in the business by over a quarter (26%) of employers, and used to fund benefits platforms by 34% of employers, or fund other employee benefits by 28% of employers. 

 The research asked employers who use salary sacrifice for their pension contributions what they currently do with the National Insurance (NI) savings they make as an employer:

From April 2029, the UK government will cap the National Insurance exemption on salary sacrifice pension contributions at £2,000 per year. This means that any pension contributions above £2,000 will incur National Insurance. 

The pension experts at Everywhen are concerned about the 68% of employers - over two-thirds - who will not make any changes, have made no decisions, are putting off considering the impact of the changes, or simply don’t know what to do (see research table below). Sorangi Shah is quick to point out that continuing to offer salary sacrifice on pension schemes, or setting it up for the first time, is still very much worthwhile.

Sorangi Shah explains: “Employees and employers can still maximise their savings for another three years. This is definitely worthwhile. There are particularly big benefits to be seen for higher rate taxpayers - who enjoy full tax relief on pension contributions automatically via pension salary sacrifice - and those affected by tax traps for tapering of child benefit or personal allowance, and eligibility for tax-free childcare benefits.

Everywhen asked what, if anything, employers are planning to do about the cap on National Insurance savings on salary sacrifice pensions contributions from April 2029:

Sorangi Shah comments: “It is great that nearly a quarter of employers are still considering setting up salary sacrifice for their pension schemes for the first time. We would urge them to do so as soon as possible to make the most of the considerable benefits before the changes come into place in April 2029. That’s three years of essentially free money! This is why it is also so good to see that 30% of employers are planning to promote the benefits of their existing scheme.

 “Even after the National Insurance savings cap is in force, salary sacrifice for pension contributions will still be worthwhile. The employer and employee will still receive up to £2,000 worth of NI savings. But it is better to make the most of the greater opportunity while it is still in place.” 

With less National Insurance savings available to be made from April 2029, the third (34%) of employers who currently fund their benefits platform from their NI savings will have to think carefully about how they do so post-April 2029. Likewise, the 28% of employers who currently fund other benefits from their NI savings will have to review how they do this.

Sharing some or all National Insurance savings with employees is likely to become less popular once the rate is capped to £2,000 per person, potentially impacting the businesses and employees of the 57% of companies who currently do this.

It would be wise for employers to take expert pension advice on how their salary sacrifice scheme is set up currently, and those 24% of employers who have said they will set one up for the first time to take advantage of the savings may want to consider how they do this so that it’s compliant when the rules change.

Sorangi Shah concludes: “For employers who allow salary sacrifice for pension contributions, the message is: review it and don’t forget to budget for the impact the cap will have from 2029. Communicate the scheme to ensure everyone makes the most of it. For employers who don’t have salary sacrifice set up, the message is to set it up now and receive the higher savings while you can. From 2029, these schemes will still be attractive, just not quite as attractive as they are now.”