Despite being pitched as a tax on higher earners, the £2,000 cap on National Insurance (NI) free salary sacrifice pension contributions is anything but.
The people most exposed are middle-income savers and the small businesses that employ them.
Is the squeezed middle ready for yet another financial blow?
How are the middle-earners worse affected?
From April 2029, only the first £2,000 of employee pension contributions each year will be free of NI.
Anything above this will be subject to both employer and employee NI contributions and the way this is calculated will hit middle earners harder than those on higher wages.
People who earn a middle income, typically between £35,000 and £50,270, face an eight per cent NI charge on pension contributions.
Even putting aside a modest portion of this income will see much of the pension contributions breach the £2,000 threshold.
Those who are higher earners and exceed the upper earnings limit of £50,270 will pay employee NI at just two per cent on those same excess contributions, resulting in a clear disparity of how the impact is felt.
This imbalance in the NI system means that those on lower incomes could pay four times the NI rate on their pension savings in excess of the new threshold than the highest earners pay.
What will this look like for employers’ National Insurance Bills?
A new 15 per cent employer NI charge on contributions above the cap may spell an end to the practice of employers topping up staff pensions to share their own NI savings.
Instead, the employees who used to benefit will now see the overall efficiency of their pension saving above the cap fall by as much as 23 per cent once lost top-ups are counted.
Staying below the threshold may be to no avail as the Office for Budget Responsibility (OBR) estimates that around 76 per cent of higher employer costs are eventually passed back to staff through weaker pay rises and trimmed benefits.
What should I do now?
The rules do not take effect until April 2029, meaning there is still time to act.
Our expert team can support you in determining the most effective way to continue supporting your team.
For middle earners themselves, understanding the best way to save will also require professional financial guidance if an increased tax bill is to be managed effectively.
Speak to our team for tailored support on how to adapt to the salary sacrifice cap.
