How Budget salary sacrifice changes could affect you

Salary-sacrificed pension contributions above £2,000 a year will no longer be exempt from national insurance (NI) from April 2029.

- KARL MATCHETT VICKY SHAW

The significant tax overhaul has prompted fears that some people's retirement savings could be jeopardised. Here we take a look at how salary sacrifice schemes for pensions work.

What are salary sacrifice schemes?

Salary sacrifice schemes permit individuals to exchange a portion of their earnings for an employer-provided benefit. Often integrated into pension plans, this offers a tax-efficient route for workers to enhance their retirement savings.

When contributing this way, the employer deposits the entire sum – including their own contribution – directly into the employee’s pension fund.

What are the planned changes?

The Office for Budget Responsibility (OBR) said that salary-sacrificed pension contributions above £2,000 would be treated as ordinary employee pension contributions in the tax system and therefore be subject to both employer and employee national insurance contributions.

Its document published alongside the Budget said: “The policy results in an increase in NICs (national insurance contributions), which is estimated to raise £4.7bn in 2029-30 and £2.6bn in 2030-31. “The costing assumes that, in most cases, employee pension contributions above £2,000 that were part of a salary-sacrifice scheme will become subject to employer and employee NICs, either because they move to a standard pension scheme or continue in a salary-sacrifice scheme under the new tax arrangements.”

The average UK salary is £35,000; if someone on this is paying 6 per cent contributions, they would be over the new threshold by £100, so that portion would be subject to NI payments.

What are the benefits of salary sacrifice schemes?