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Business and pension experts have urged the government not to restrict the tax benefits of salary sacrifice schemes, warning that any upside for the government would be “incredibly short term” and store up problems for the future through a lower retirement savings rate.
The government is looking at capping the amount of money that can be put into a pension salary sacrifice scheme without paying national insurance at £2,000 a year. Above this, the usual NI rates would apply — 15 per cent for employers and 8 per cent for employees on salaries less than £50,270 and 2 per cent on income more than that.
People briefed on Chancellor Rachel Reeves’ Budget preparations said it was “not finalised” whether the restrictions would also apply to other benefits with tax advantages provided by salary sacrifice schemes, such as childcare, cycle-to-work schemes and low emissions vehicles.
Salary sacrifice on pension schemes costs the government £4.1bn in lost national insurance payments, according to figures from HM Revenue & Customs, of which £1.2bn comes from employees and £2.9bn from employers.
The government estimates it will raise £2bn by removing the NI contribution benefit for pension salary sacrifice contributions of more than £2,000.
But pension experts are warning that many large employers would respond to the change by lowering the amount they pay into pensions to offset the 15 per cent NI charge.
The proposals “store up problems for governments down the line, it’s incredibly short term”, said Robert Salter, director at accountancy firm Blick Rothenburg. “It discourages pension saving at a time we are not saving enough anyway and will reduce the funds available for domestic investment.”
A survey of the firm’s clients last year found that 77 per cent offered salary sacrifice schemes to their staff but only 20 per cent passed on all of the employer NI savings to employees in higher pension contributions.
A pension manager at a large UK-based company said that while the companies likely to cut pension contributions were the ones passing on NI savings, there could be a wider impact. “Perhaps pay rises or bonus pools are a bit smaller than they would’ve been. Or hiring activity is reduced. Or investment is pulled.”
A business representative speaking on condition of anonymity said: “Essentially what we are talking about is another increase in national insurance . . . This could lead to companies lowering headcounts and investing less.”
For someone who earns £125,000 and saves £25,000 of this directly into their pension, Reeves’ plan could cost them an additional £460 a year and their employer £3,450 a year in extra NICs, according to accountancy firm RSM.
Someone earning £45,000 and sacrificing 5 per cent of their salary would pay an additional £30 a year in NI and their employer would pay an extra £34, according to RSM.
“This is the wrong policy choice,” said Zoe Alexander, executive director at Pensions UK, an industry group, adding that limiting salary sacrifice would hit retirement savings and potentially lead to lower pay rises.
In July, the government set up a pensions commission to look at the “massive” problem of shrinking pension incomes and whether employers and their staff should pay more into retirement pots.
Policymakers are also trying to direct more retirement funds into the domestic economy by coordinating a voluntary agreement across the largest pension providers to invest at least 5 per cent of their default fund defined contribution assets in UK private markets by 2030.
Yvonne Braun, director of policy, long-term savings at the Association of British Insurers, said proposals to cap the tax advantages of salary sacrifice schemes “prioritise short-term revenue raising over long-term economic resilience”.
Salary sacrifice is more common among private sector employers than public sector ones. An analysis by the Institute for Fiscal Studies think-tank in 2021 found that average employer pension contributions were three times higher in the public sector, at 18 per cent, than in the private sector at 6 per cent.
“The government’s claims to want to support business, employment or the economy sound more and more suspect by the day . . . the public will not take it well if those on gold-plated public sector pensions pull the rug under the taxpayers ultimately paying their wages,” said Tina McKenzie, policy chair for the Federation of Small Businesses.
Additional reporting by George Parker