How to make the most of salary sacrifice pensions before the changes happen in 2029
In last year’s Autumn Budget, the government announced a cap on salary sacrifice pension contributions, starting from April 2029. Whilst this change isn’t immediate, employers and employees alike will be wondering exactly how this will affect them.
The answer to that is currently a little unclear, as the details are still evolving. But what we do know is that salary sacrifice will continue to offer a range of significant advantages for both employers and employees.
What are the proposed changes to salary sacrifice pensions?
The government has set out plans to charge National Insurance (NI) on salary sacrifice pension contributions above £2,000 from April 2029.
Since then, peers in the House of Lords voted to raise the proposed cap to £5,000 – more than doubling the initial limit. However, this was rejected in the House of Commons.
Salary sacrifice is one of the most effective and straightforward ways for employees to build their retirement savings helping long-term savers achieve better outcomes.
How do employers currently benefit from salary sacrifice?
- Savings on NI contributions: Depending on how many members are in your workplace pension scheme, annual NI savings could quickly add up. This is because the salary they sacrifice doesn’t count towards NI contributions. These savings could be reinvested back into the business, or you could choose to pass these savings onto your employees by paying the money into their workplace pension plan.
- Reduced impact of financial stress: Money worries can impact your employees’ mental health, which could have a knock-on effect on their productivity at work. Given that a salary sacrifice pension effectively increases employees’ take-home pay, it could provide a much-needed boost to both their pockets and wellbeing.
- Improved recruitment and retention: Employers aren’t obliged to offer salary sacrifice, so if you do, it could make you stand out from the crowd when recruiting.
The same goes for your existing staff too; they’ll be more likely to stay put if you offer a comprehensive and flexible employee benefits package.
How do employees benefit from salary sacrifice?
- Tax relief on pension contributions: Because part of an employee’s salary is exchanged for a pension contribution, their salary is reduced – meaning they’ll pay less in Income Tax and NI. As a result, they get to keep more of their take-home pay whilst still saving into their workplace pension scheme.
- Bonus sacrifice could offer a boost: If employees get a bonus, they could also consider using salary sacrifice to put some or all of it into their pension plan. This could give their pension pot a significant one-off boost and allow them to keep more of their money.
How will the post-2029 changes affect employers?
- NI savings will be capped – but not removed: From April 2029, employers will continue to benefit from NI savings on salary sacrifice pension contributions up to the £2,000 capped amount. While savings above the £2,000 cap will be reduced (employer NI is currently 15%), salary sacrifice will still deliver some annual savings. It can still serve as a valuable part of your reward and benefits package too.
- Communicate and plan early: There’s plenty of time to prepare for the upcoming changes and put effective plans in place. For instance, if you usually pay bonuses later in the year, it may be worth bringing this forward into March for 2029. It’s also worth using this time to communicate the overarching benefits of salary sacrifice to your employees. Some may mistakenly think that the new cap means there are no tax efficiencies to using salary sacrifice and lower their contributions or opt out as a result. So early and clear communication is key here.
How will the post-2029 changes affect employees?
- Consider maximising NI savings now: Now’s a good time for employees to maximise their NI savings before the changes take effect (if it’s affordable and right for them). After April 2029 – and based on the current proposal – employees who sacrifice more than the £2,000 cap into their pension will pay 8% in NI on earnings up to the Upper Earning Limit (UEL), and 2% on earnings above the UEL.
- Tax relief still remains: The upcoming changes don’t alter the fundamental benefits of salary sacrifice pensions – they’re still a tax-efficient way for employees to save for retirement. Although NI will apply to contributions above the cap, salary sacrifice will remain beneficial for employees – particularly for those contributing within the capped limit. For employees contributing more, like other pensions, Income Tax savings will still apply – and they’ll still benefit from employer pension contributions.
For more information on financial wellbeing, including resources on how you can help support your employees, look at our Financial Wellbeing hub and read our articles.
The information here is not financial advice. If you or your employees are unsure, please speak to a financial adviser.
Supplied by REBA Associate Member, Standard Life
Standard Life is a retirement specialist focused entirely on retirement savings and income.
