Salary sacrifice pensions contributions have always been an excellent tool of managing employee and employer tax and National Insurance contributions (NICs).
It allows employees to sacrifice a portion of their salary to too up their pension, which is not included in their tax fee allowance and can, therefore, ensure more of their income is taxed at a lower rate.
However, from April 2029 this may no longer be the most tax efficient option.
What are the changes to pension salary sacrifice?
As of April 2029, there will now be a cap on how much money you can salary sacrifice that is National Insurance (NI) exempt, this cap is £2,000.
Any amount that is sacrificed over the £2,000 limit will mean that employees and employers will have to pay NICs as if the amount is taken from their regular earnings.
Currently, pension contributions made via salary sacrifice are highly tax efficient, however new rules will put a limit on these savings.
While this may no longer be tax efficient for NI contributions this sum is still exempt from Income Tax.
How will this affect a business’s payroll?
Starting in April 2029, payroll will need to be adapted to operate in line with these new salary sacrifice rules.
Many employers may consider scrapping pension salary sacrifice all together, this will require changes to payroll processes to fit in line with any new company policies.
If an employer continues to partake in pension salary sacrifice, they will have to pay a 15 per cent NI contribution for any sacrifice that exceeds the cap.
Employee NICs will also be affected by these changes and they will have to pay NI contributions at eight per cent for basic earners or two per cent for high-rate taxpayers on any amount above the threshold.
This will slightly reduce the net take home pay for higher earners.
There will also need to be changes to payroll software as it will need to be updated to separately track employee pension salary sacrifices and calculate NICs on the portion that breaches the allowance.
What should you be doing to prepare?
Though the changes may feel like they are far in the future waiting until the last minute could limit your options.
Employers should start modelling the financial impact of the employer NI contributions being applied to salary sacrifice.
This can be done by reviewing contribution matching policies, bonus sacrifice arrangements and whether current pension contributions are still financially sensible when the new rules apply.
It is important to have open and honest conversations with your employees so they understand how these reforms will affect their take home pay.
How can we help?
Sorting out payroll in an everchanging climate can be tricky, which is why it is always a good idea to get outside help on your payroll.
Our talented team can advise on payroll best practices on the lead up to the changes in 2029.
With the correct support your payroll can adapt to these changes before they even begin to better benefit employees and employers.
For more information on payroll services get in touch today.
