The Budget changes to salary sacrifice don’t just mean higher NI bills for employers — for some they could cause extensive administrative and legal complications.
On Budget Day, the pension sector saw confirmation that salary sacrifice would be capped at £2,000 though, surprisingly, not until 2029, leaving several years for employers to adapt their pension and employee benefit strategies and systems.
But experts are urging employers to begin to consider these strategies now.
More information is also becoming available. HMRC’s impact assessment, published in early December, estimates that 3.3m out of 7.7m employees using salary sacrifice were making contributions of more than £2,000 a year. As a result, 44 per cent of employees using this system will be impacted in some way.
Of those with salary sacrifice contributions in excess of the contribution limit, HMRC estimates that in the first tax year (2029/30) the average employee NI liability will be £84. There will of course also be costs on employers.
Accountants PKF Francis Clarke suggest in an analysis, published at the time of the Budget, that those with pensionable pay of £40,000 making a contribution of 5 per cent should not be hit by the cap, perhaps they suggest, by design.
But it added that taking pensionable pay of £40,000 but increasing contributions to 7.5 per cent results in an increase to employer liabilities of £150 per year, with £80 more being due from the employee.
For a business with 10 employees, the cost would be £1,500 annually and for those with 100 such employees, £15,000 per year.
Former pensions minister and campaigner Baroness Ros Altmann, echoing many advisers, welcomed the decision to delay the change to 2029, but noted that scheme design and contributions can dictate the cap’s impact.
She says: “If employers and individuals are paying, say 8 per cent of salary (with 5 per cent coming from the employee) into their pension, then the impact of the £2,000 limit will hit take-home pay of those earning over £40,000 a year.
“If contribution rates are higher than the minimum, this could kick in at lower levels, so a worker paying in 10 per cent of salary and earning £20,000 a year would also experience reduced take-home pay.”
But such relatively straightforward cost calculations do not, of course, take into account other administrative and systems changes, so corporate advisers are suggesting that employers begin to think about the changes they want to make now.
Start planning now
Hannah English, head of DC corporate consulting, Hymans Robertson, says: “Employers should start planning now rather than waiting until 2029. The upcoming salary sacrifice changes could significantly impact costs, particularly for higher-paid workforces and generous contribution structures.
“Whilst employees can ensure they maximise salary sacrifice usage now ahead of the changes, employers should start planning early for the changes and consider what options are available to them to manage the increases that are likely to come in 2029. Options include adjusting contributions, redesigning benefits, and leveraging defined benefit surpluses to offset costs.
“Acting early ensures informed decisions are made and employers have a wider range of strategic avenues to consider. Furthermore, acting early avoids employers having to suck up costly changes as the deadline approaches.”
Can your payroll provider cope?
Gallagher Benefits Consulting leader Mark Pemberthy says: “There will be greater impact in those sectors where pensions have been an important part of reward, so financial services, professional services and tech companies. It will be a significant change and HR reward teams will be looking at the total cost of the workforce. There is a possibility that will come through in lower salaries and restructured benefits.”
It is definitely a case of telling clients ‘Don’t Panic’, he says. “But we are engaging with clients and encouraging them to plan for this. Most of our clients look at three to five-year horizons for financial planning and budgeting so it is coming into that. This means understanding cost implications and engaging
with payroll providers to understand what is needed to fulfil reporting requirements.
“Will employers even be able to operate salary sacrifice if payroll providers are not able to support the reporting and collection of national insurance on anything over £2,000? Will there be some payroll providers not prepared to offer it or not able to do it on time, where there are significant pension design questions?
“It will pay to get ahead of the game. We are seeing some questions from people who think they can’t save more than £2,000 into a pension now! People do catch on to soundbites that aren’t accurate. So, there is an opportunity for employers to offer reassurance to employees and then to start planning.”
Impact on other benefits
A recent Occupational Health Assessment webinar attended by over 100 employers representing more than 100,000 UK workers suggested that 14 per cent of employers use NI savings to make additional pension contributions, while 13 per cent use the savings to fund other employee benefits. Both figures exceed the proportion of firms (11.9 per cent) using salary sacrifice primarily to generate financial savings for the organisation itself.
Independent benefits consultant Steve Herbert has cautioned that organisations using NI savings to fund other benefits face an additional hurdle. He says: “More than one in 10 organisations use the employer NI saving to fund other employee benefits offerings. These organisations should consider how those benefits will continue to be funded if the pension saving is significantly reduced in future years.”
One corporate adviser added that there is concern that advisers have highlighted these savings, and recommending they be used to fund other benefits such as group income protection.
They suggest that could now lead to difficult conversations with employer clients, adding that pay settlements and schemes may have been designed around basic, higher and additional tax rates. This could, the adviser warns, bring a significant headache for employers when considering their future strategies.
Contracts
Altmann’s analysis raises a number of questions such as whether employers would need to renegotiate employment contracts for staff who agreed to a pay cut to accommodate salary sacrifice which no longer applies.
One employment lawyer, Dan Chapman, managing partner at Leathes Prior Solicitors, wrote an article early in 2025 raising concerns about how some salary sacrifice schemes were being
set up.
He says: “Employers now face some strategic dilemmas. Do they look to retain, redesign or remove their schemes? Employers will be considering the cost impacts as employer NI liability increases, or the savings evaporate and deciding whether they will look to absorb the costs themselves or shift the costs to employees.
“Any changes to the salary sacrifice arrangements will present a myriad of legal, HR and communication challenges, and for many large employers the schemes have become a vital part of their business — either because they use these schemes to reduce their NI liability, or because it is part of their total reward offering to recruit and retain talent.
“Some existing salary sacrifice schemes are, without doubt, already carrying residual legal risk because they have not been set up properly. Those employers who now recognise this as applying to them (many of whom were swept along by enthusiastic sales pitches) will do well to take advantage of the forthcoming changes to derisk their position and exit the arrangements in place, in full or in part.”
Chancellor blames bonuses
There are also some emerging concerns around how firms manage and approach bonuses and redundancies, where salary sacrifice is often involved. Indeed, the Chancellor recently blamed putting bonuses into a salary sacrifice arrangement as one reason for the reform.
In the evidence session, the Treasury committee chair Meg Hillier raised the problem of people especially young people not saving enough. The Chancellor Rachel Reeves replied: “You can still put £2,000 in and have exactly the same tax benefits as you previously had, but any contribution over £2,000 will get the pension tax relief, but not the additional salary sacrifice reliefs. That is the tax relief that was always supposed to be applied to pensions
“Salary sacrifice was only ever expected to top up pensions. It has been used as the main vehicle. Also we saw a lot of people paying large bonuses in through salary sacrifice to take advantage of that tax treatment in a way that was never envisaged.”
She suggested that this measure and others, such as the changes to employee ownership trusts, was merely a case of bringing these plans back to their original intention.
Impact on bonuses and redundancies
Syndaxi Financial Planning director Robert Reid says: “In future employers will have to work out the revised cost of bonuses. In other words, the NI they will have pay, in situations where previously up to 90 per cent of employees put this into their pension.
“Does the change mean they should assume no one puts it into a pension? Or should they cut back the bonuses, so they are in the exact same position before the salary sacrifice cap, where essentially bonuses get cut 15 per cent.
“The second part is that bonuses are an easy and cheap target. But what of redundancy and salary sacrifice? It’s been £30,000 tax free since 1988. But say someone is receiving £96,000 and would generally take the £30,000 and then would have put most of the rest into the pension.
“All of a sudden, there’s a big differential for employers and employees. Employers may try to cut the redundancy by the extra NI amount.”
Changes may be several years away, but it is clear that there are administrative, tax and legal hurdles ahead of many businesses to ensure a smooth transition in 2029.
Opinion: Non-contributory solution?: Steve Webb, partner, LCP
We currently have a small number of non-contributory DC schemes in the UK, offered by ‘good’ employers. It is hard to see that anything that these currently do will be caught by the new tax. So it may be possible for an employer to restructure their pay/pension package to tailor a salary sacrifice scheme (where there’s a smoking gun in the form of a contractual amendment to take a pay cut in return for the company paying more pension) to make it more like a non-contributory scheme. There are two potential approaches:
- Over the next three years the employer moves to a completely non-contributory model; for example, instead of 6 per cent employer contribution plus 6 per cent employee contribution currently paid by salary sacrifice, employees are moved to 8+4, 10+2 and 12+0; this is paid for by lower pay rises than would otherwise have been given. Because the employer has three years to adjust, the impact is lower each year. Because the employer is saving a 15 per cent NI hit on the element above £2,000, it might ‘spend’ some of this on a better pay+pension deal overall
- The employer follows the same process, but only until no-one is sacrificing more than £2,000.
It’s all a bit messy to unpick, but because Britain’s employers are set to pay the lion’s share of the £4bn+ expected to be raised in the first year, they have a pretty big incentive to sort this out.
