Autumn Budget: Pension salary sacrifice – considerations for employers

This measure will have a cost impact for most employers operating pension salary sacrifice, with additional employer NI and Apprenticeship Levy (AL) payable on pension salary sacrifices exceeding £2,000. For employees making a 5% pension contribution, this will broadly start to impact employees with annual earnings exceeding £40,000 so it will capture several basic rate taxpayers (the government accept it will impact c.26% of basic rate taxpayers, as well as employees paying tax at higher rates). 

While this may not seem material for individual lower-paid employees (see illustrations below), once extrapolated across the workforce, the additional costs could soon be material. Whilst employees being paid at or near the National Minimum / Living Wage (NMW) are unlikely to be impacted by this change, employers may want to consider the overall additional costs of both this change and the increased NMW rates taking effect from April 2026 (and future anticipated increases) when undertaking workforce planning. 

As well as direct costs, assuming that this will be treated as an additional NI threshold that will only apply to pension salary sacrifice, employers will need to factor in any additional payroll costs, as well as costs associated with setting up new processes to ensure that the threshold is being applied to the right pay element. While this sounds simple, there is a lot of room for error here, particularly for employers that operate a number of salary sacrifice arrangements.

Key considerations ahead of 2029 for employers participating in pension salary sacrifice

• Calculate the anticipated additional annual employer NI and AL costs because of this change. When undertaking this exercise, employers may want to factor in potential salary increases (including any impact of anticipated NMW increases).
• Revisit any cost/benefit analysis, particularly given the expectation that the post-sacrifice salary will still be the pay figure when considering the NMW (e.g. an employee with pre-sacrifice pay of £50,000 making a pension contribution of £2,500 would still have pay of £47,500 (£50,000 - £2,500) for NMW purposes, irrespective of this change). 
• Consider whether pension salary sacrifice is still the most appropriate option or whether other options may be preferable, e.g. reverting to a net pay or relief at source arrangement, moving to a wholly employer-funded contribution.
• Consider the impact on any bonus sacrifice/waiver arrangements.
• Consider the merit of hybrid arrangements, e.g. allowing employees to sacrifice up to £2,000, whether as an additional voluntary contribution, as part of a bonus waiver arrangement, capping the sacrifice at £2,000 with the shortfall either becoming an employer funded contribution or moving to a net pay/relief at source arrangement (auto-enrolment obligations and pension scheme requirements will also need to be considered).
• Employers sharing their NI savings with employees should revisit this, particularly where the cost savings will be reduced.
• Liaise with the payroll provider to understand how this will be facilitated via the payroll software.
• Update processes to ensure that a review of the application of this NI threshold is built in. Employers may also want to review NMW processes to make sure these are still working effectively, particularly given that this will be a focus of the Fair Work Agency and new powers are expected to be introduced.
• Consider communicating the impact of the change to employees, particularly those who will be impacted.

Employers considering implementing pension salary sacrifice arrangements should revisit their cost modelling and any cost/benefit analysis undertaken. While there are still potential benefits for employers and employees, employers should factor in the additional administrative burdens imposed by this change.

Illustrative impact on employer costs and employee net pay

• For an employee with annual earnings of £46,000 (Employee A), applying the current rates and thresholds, this would lead to additional employee NI of £24 per year and additional employer costs of £45.01 per year (employer NI and AL). Where Employee A is making student loan repayments, this would lead to a further reduction in net pay of £27 per year, i.e. a total reduction to net pay of £51 per year. 
• If we assume Employee A is making a 10% pension contribution, this would lead to additional employee NI of £208 per year and a student loan contribution of £234 per year, a total reduction in net pay of £442 per year. The additional employer costs (NI and AL) would be £390.07.
• For an employee with annual earnings of £100,000 (Employee B) making a 5% pension contribution, this would lead to additional employee NI of £60 per year and a student loan contribution of £270 per year, reducing net pay by £330 per year. The additional employer costs (NI and AL) would be £450.08 per year.
• If we assume Employee B is making a 10% pension contribution, this would lead to additional employee NI of £160 per year and a student loan contribution of £720 per year, a total reduction in net pay of £880 per year. The additional employer costs (NI and AL) would be £1,200.20.

This was first published in Tax Journal on 27 November.