3.3 million retirement savers facing salary sacrifice changes

Around 3.3 million pension savers are set to be hit by the salary sacrifice changes announced in the Budget, figures from HM Revenue and Customs (HMRC) show.

Guidance published online by HMRC on the changes indicates that around 7.7 million employees are currently using salary sacrifice to contribute to their pension.

Of these, 3.3 million are sacrificing more than £2,000 in salary or bonuses.

Changes announced in the Budget will mean foregone pension contributions above an annual threshold of £2,000 will no longer be exempt from National Insurance (NI) from April 2029.

Contributions over £2,000 will be treated as ordinary pension contributions in the tax system and subject to NI contributions.

Employers can offer salary sacrifices as part of their pension scheme, which is a tax-efficient way of helping workers increase their pots.

These schemes allow people to maintain their take-home pay because they end up paying lower NI contributions.

The Budget announcement was criticized by pensions industry bodies, who argued many people would already be facing financial difficulties later in life.

Yvonne Braun, director of policy, long-term savings, health and protection at the Association of British Insurers (ABI), has previously said that “the wider work required to restore public confidence in pension stability will take years”.

People often increase and decrease their pension contributions throughout their working lives, depending on factors such as their other financial commitments and expenses, and how close they are to retirement.

HMRC guidance states that employees who have paid salary sacrifice contributions are considered to be of typical working age.

He specifies: “In particular, people aged 31 to 50 (52%) would be over-represented compared to their prevalence in the employed population in general (44%).

“Men are also estimated to be over-represented in the population sacrificing their wages for pension contributions (59%) compared to their prevalence in the UK adult population (50%). »

The document also states: “This measure is expected to impact 290,000 employers who implement salary sacrifice arrangements for pension contributions, who will now be required to account for the relevant pension contribution amounts, report and pay First Class National Insurance contributions on these where applicable.

“One-off costs will include familiarization with the change, training staff and updating software. Ongoing costs will include carrying out more calculations, recording and providing additional information to HMRC where salary sacrifice schemes continue to be used.”

Regarding other operational impacts, the document states: “HMRC will need to make IT changes to support the implementation of this measure. These changes are expected to cost approximately £1.9 million.”

The document also states: “The salary sacrifice for pension contributions remains, and its cost as relief has increased significantly, from £2.8 billion in lost national insurance contributions in the 2016 to 2017 tax year, to £5.8 billion in the 2023 to 2024 tax year.

“If no changes were made, this amount is expected to almost triple to £8 billion by the 2030 to 2031 financial year.”

Sir Steve Webb, a former pensions minister and now a partner at consultancy firm Lane Clark & ​​Peacock, said the impacts on workers could be greater if employers responded to the changes by making pensions less generous for all workers.

Sir Steve said: “A Budget measure that was widely seen as complex and technical could have significant real-world implications for millions of workers.

“At a time when the nation as a whole is facing a significant ‘under-savings’ problem, this change will only make things worse.

“According to the government’s own estimates, around three in seven workers who use salary sacrifice to contribute to their pension will be affected by the change, while employers will face a greater impact due to their higher national contribution rates.

“Even if employers have time to consider their options between now and 2029, there is a risk that some will simply reduce the generosity of their workplace pension offering, which would be a serious step backwards.