Once a bastion for lowering National Insurance Contributions (NICs), salary sacrifice pension schemes may be coming to an end.
From April 2029, a £2,000 annual cap on National Insurance (NI) relief will be imposed on the schemes.
While it is a way off, some employers are already reassessing the viability of these arrangements.
Will businesses stop using salary sacrifice pension schemes?
A new study by the Standard Life Centre for the Future of Retirement found that 39 per cent of employers offering salary or bonus sacrifice schemes are now less likely to continue providing them once the cap is introduced.
The announcement alone was enough for 11 per cent to already withdraw their schemes, so it is likely that other employers will follow suit.
3.3 million employees are expected to be impacted by the cap, as over 3,000 UK companies currently offer salary sacrifice pension schemes.
Even after the change, pension contributions will still escape Income Tax, but the addition of employee and employer NICs will increase payroll costs.
Are all businesses affected by the change in the same way?
As with many other recent changes, small and mid-sized employers are likely to be particularly exposed.
The cap would make 49 per cent of businesses with 10 – 49 employees less likely to offer salary sacrifice pension schemes.
Generous employers seem particularly disadvantaged, as going beyond the minimum auto-enrolment contribution or matching higher employee contributions will likely face challenges absorbing higher NICs.
At higher salary levels, the employer’s exposure rises further.
Is this the end for salary sacrifice pension schemes?
Treasury estimates indicate that the changes will save £4.7 billion annually in tax relief, but the concerns about pension saving persist.
There is a worry that many are already under-saving for retirement and restricting salary sacrifice schemes could make this worse, especially as many rely on workplace schemes to build long-term financial security.
For employers unsure of what to do, getting expert advice now can help them to make the right decisions.
Keeping the 2029 deadline in view lets businesses model the financial impact of the change while considering ways to continue supporting employees.
More information will be revealed about the implementation of the reforms in time, so now is the time to review your pension arrangements and alert employees of any upcoming changes in strategy.
