Clarity on salary sacrifice
Paul Lewis demystifies the Chancellor’s plans for pension contributions
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Many people have been confused by the announcement in the Budget last November of restrictions to what is called salary sacrifice for pension contributions. More than seven million employees use it to boost their pensions, and some big companies routinely reduce salary to pay contributions into a pension scheme – they sometimes call this salary exchange. It works like this: an employee agrees in writing to be paid less, and their employer puts the money given up into their pension. In this way the employee pays no tax or National Insurance Contributions on the amount of pay given up. All contributions paid into a pension are free of income tax anyway – the money is normally deducted before the tax is worked out – but National Insurance Contributions are still due on the amount paid in. Salary sacrifice avoids that.
There is currently no particular limit on how much salary can be given up. However, in her Budget last November the Chancellor announced plans to restrict the amount allowed to £2,000 a year. Any extra would have employee National Insurance Contributions deducted. That would mean a charge of 8% for any earnings up to £50,270 (and 2% for earnings above that). The employer would also have to pay National Insurance Contributions on that excess. At the moment an employer does not pay NICs on the contributions it makes to a pension, but after the change NICs at the full employer’s rate of 15% will be applied to any contributions paid through salary sacrifice which exceed £2,000 a year. The change will not start until April 2029. And when it does, it will not reduce the amount an individual can pay into their pension: that will stay at a maximum of £60,000 a year or their total earnings (whichever is less). All money paid into a pension will remain free of income tax for anyone under the age of 75 but normal contributions will continue to have NICs deducted.
There’s no need for anyone to change their behaviour or the amount they pay into a pension though some who can afford it may ask for a bigger salary sacrifice until April 2029. Employers are likely to change the salary sacrifice system after that, so ask what its plans are.