Autumn Budget: Capping NIC relief on pension salary sacrifice will disincentivise wage ambition
As widely predicted, from April 2029 NIC relief on pension contributions, as a result of salary sacrifice arrangements, will be limited to £2,000 per tax year. Contributions over this cap will be subject to both employer and employee national insurance contributions (NICs) at the standard rates.
Andrew Timpson, employment tax partner at RSM UK comments: “This is good news for employees earning less than £40k per annum, but this will likely now reduce any ambition to earn more, as at many levels they are being hit with disincentives to do so.
“Currently, with salaries over £100k the personal allowance is tapered, at over £60k the child benefit is tapered and from April 2029 over £40k of pension savings will be impacted by an NIC charge. The tax and NIC thresholds will also be frozen, meaning more employees will be dragged into the higher rate tax band each year. In summary the incentive to earn more money is eroding, and the fortunate employees earning more than £40k will see their pension savings reduced from April 2029.”
For the estimated 50% or more of UK employers who offer pension salary sacrifice arrangements, this will result in additional costs and more complex payroll and administrative considerations.
By way of practical and contrasting examples:
- Employee A earns £40,000 and sacrifices 5% into pension, in line with the auto-enrolment minimum. This equates to a £2,000 sacrifice, meaning the employer and employee have nothing to pay.
- Employee B earns £60,000 and sacrifices 5%, or £3,000. The employer has to pay 15% of £1,000, so £150 per annum for the employer and £20 for the employee.
- Employee C earns £35,000 but wants to save more for retirement, so sacrifices 20% into pension, or £7,000. The employer has to pay 15% of £5,000, so £750, and the employee will pay £400.
Andrew adds: “The chancellor was clear that those employees paying close to, or at the national minimum wage cannot benefit from the pension salary sacrifice, but has done nothing to help these workers enter into this advantageous arrangement, something that could have been achieved, particularly since the chancellor has included the cap for all employees.”