With chancellor Rachel Reeves announcing plans for UK businesses to foot the bill for a £40bn tax increase – primarily through national insurance contributions – attention has turned to where companies can offset this cost.
Pensions industry commentators immediately cited the example of salary sacrifice arrangements. These involve staff accepting lower take-home pay – and a potentially lower income tax bill – in exchange for other benefits, in this case pension contributions.
Employer pension contributions are exempt from national insurance calculations, and despite rumours that the chancellor was looking to change this, it remains the case – meaning more companies could benefit from the salary sacrifice approach.
According to research published last year by Workplace Pensions Direct and YouGov, roughly half of UK businesses are using salary sacrifice for pension contributions.
Steve Leigh, associate partner at Aon, explained: “As many employers operate a salary sacrifice or salary exchange arrangement for their workplace pension, the employer national insurance increase means that they would make greater savings where employees use this method to contribute to the pension.
“Employees could also potentially benefit here in cases where their employer shares some of the company national insurance savings with them via addition pension contributions.”
Leigh added that the increase to the National Living Wage would also need to be taken into account so employers can avoid inadvertently breaching this limit when implementing salary sacrifice.
He continued: “The increase in employer national insurance will also impact costs to those employers that offer cash in lieu of pension contributions for some or all employees, potentially making these less attractive as a benefit option.”
A more tax-efficient approach?
Many people have now forecast that interest could spike as businesses seek to save money.
David Piltz, chief executive officer at Gallagher Benefits Services, said: “Ironically, after all the speculation over pension tax relief, this change will make pension salary exchange and other tax efficient benefit options even more attractive to employers.”
Tim Camfield, a senior consultant at LCP, said: “After months of speculation of a ‘tax raid’ on pensions, the overall impact of today’s Budget is to make pension provision more tax efficient for employers relative to salary or other benefits.
“Those that don’t yet make use of salary sacrifice for employee pension contributions should consider doing so, and those that do should consider further opportunities, like bonus sacrifice.”
Sophia Singleton, head of defined contribution at XPS Group, said the exclusion of pension contributions from national insurance would create an opportunity for employers not using salary sacrifice to “review whether now is the right time to introduce this”.
Further reading
Budget 2024: Reeves raises employer national insurance (30 October 2024)
