A shakeup of the National Insurance contribution (NIC) threshold for salary sacrifices will lead to employers “squeezing wages, cutting back on pensions or giving up on salary sacrifice altogether”, an expert has warned. In the last Budget, the Treasury announced that from April 2029, pension contributions through salary sacrifice above £2,000 a year will cease to be exempt from NICs.
Salary sacrifice is a “government-backed arrangement that allows both the employer and their employees to save on tax” by “allowing employees to exchange part of their salary in return for an employer pension contribution”, the People’s Pension website explains. This results in a reduction in workers’ gross salary, with neither the employer nor the employee paying NI contributions on the amount exchanged, the organisation adds. When the Treasury announced the changes, it pointed to HMRC figures estimating that 7.7 million employees use salary sacrifice to make pension contributions, with 3.3 million of them sacrificing a figure in excess of £2,000, with some 4.3million workers not directly affected.
But a new analysis by the Office for Budget Responsibility (OBR) published on Thursday last week reaffirmed that many workers sacrificing less than £2,000 would lose out due to various knock-on effects.
The supplementary forecast information was published following a request from various figures in the pensions and finance world, including LCP partner and former pensions minister Steve Webb, who wanted further analysis on the budget’s wider impacts.
Mr Webb, a former Lib Dem MP who served in David Cameron’s Coalition Government, described the change as “a multi-billion pound hit on employers who will not take it lying down”.
Speaking to Sky News’ Money blog, Mr Webb noted the OBR’s finding that in response to increased costs as a result of the move, “employers could increase contributions in place of wage growth or lowering contractual salary”, though the body notes that these are potential impacts, and the response of employers is “uncertain”.
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But Mr Webb was less cautious on the matter, saying employers will respond “by squeezing wages, cutting back on pensions or giving up on salary sacrifice altogether”.
“In all these cases, the impact will not be restricted to the 3.3 million people who sacrifice more than £2,000 per year – as claimed by the government – but could spread to millions more employees in those workplaces who could all suffer.”
In response, a Treasury spokesperson told the outlet: “This isn’t new information – the costing note published at budget included the behavioural impacts of the measure.
“Our reforms protect 95% of workers earning under £30,000 who use salary sacrifice, while tackling costs that were set to treble to £8bn as high‑earners piled in bonuses tax‑free.”
