Salary sacrifice cap could lead to “unfair” outcomes

Today the Chancellor announced that the employee and employer National Insurance (NIC) advantages of pension salary sacrifice schemes will be capped from April 2029. NIC will be payable by both employee and employer on contributions over £2,000. Income tax relief on salary sacrificed pension contributions will continue as before.  

Ellen Milner, CIOT Director of Public Policy, said: 

“The impact of capping the NIC benefits from pension salary sacrifice could be felt as a reduction in take home pay or reduced pension contributions for the employee, and additional NIC cost for the employer. 

“It could also result in outcomes between employees that seem unfair. For example, it could be that the same level of pension contribution is provided to two employees working alongside each other but, because of how each negotiated their remuneration package, they are taxed differently on their pension savings. 

“The change will disproportionately affect basic rate taxpayers because they will pay at 8% NIC on contributions over the £2,000 cap, compared with a 2% charge on higher earners. It will also disproportionately impact those with student loans who earn above the repayment threshold, as they will have incurred an extra 9% student loan deduction from their pay.  

“We do not currently know whether the annual cap will be apportioned across the length of time in a tax year in that employment, nor whether the cap will be per employment or per person. If the former, this would seem to allow those with multiple employments to use multiple £2,000 caps.” 

Ellen Milner added: 

“While the full detail is unknown, we do welcome the deferral of this change to April 2029. Pensions salary sacrifice arrangements are, for many workers, negotiated on an annual basis, and a change of tax treatment within that period would have created unfairness and confusion. The deferral to April 2029 will give employees time to review their retirement saving plans and adjust accordingly.”