Staggering increases in National Insurance Contributions (NICs) have seen employers face immense challenges when trying to pay employees for their hard work.
One safe avenue was to utilise salary sacrifice pension schemes to ensure that employees would still reap the rewards of their efforts, but not face heavy tax burdens for doing so immediately.
Now these are under threat and a new approach to payroll may be required.
What is changing with salary sacrifice pensions?
From April 2029, a £2,000 annual cap on NIC relief for pension contributions will be imposed.
This severely diminished the benefit of using such schemes, as the main draw was the removal of NICs from employee compensation.
To make matters worse, the different NIC rates will see middle earners face a steeper burden than those who earn more.
An individual whose earnings exceed the upper earnings limit of £50,270 pays employee NICs at two per cent on pension contributions above the £2,000 cap.
By contrast, anyone earning between £35,000 and £50,270 will pay an eight per cent NIC charge on excess contributions.
This imbalance in how NICs are managed could see those on lower incomes paying four times the NI rate on their pension savings in excess of the new threshold than the highest earners pay.
As a result, salary sacrifice pension schemes are no longer a favourable option for employees or employers if the current reforms do take effect.
How will these changes impact payroll?
As 39 per cent of employers are already considering pulling the plug on salary sacrifice pension schemes, any changes will be reflected in how payroll is processed.
More tax will likely be present, regardless of what option an employer takes.
It is also possible that withdrawing such schemes will see an employee’s income spike, potentially pushing them into a higher rate of tax.
Any changes in tax rate must also be reflected in payroll and it is best to ensure that a tax code is appropriate for an employee’s circumstances.
While it might seem intimidating to know which way to turn, but getting expert payroll support can provide some clarity.
Our team can assist you with managing your payroll obligations so that you are accurately supporting your team.
Our experts can also help you to understand the wider impact of employee expenses on your budget so that you can determine the most effective way to reward your team.
Other tax-efficient options may be beneficial for your business, but this can only be determined with tailored, expert support.
Salary sacrifice pensions may be coming to an end for many, but our team will ensure your payroll processing lives on.
Speak to our team for expert support with managing payroll, even as requirements change.
