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The chancellor’s announcement of a proposed £2,000 National Insurance restriction on salary sacrifice (or salary exchange as it’s sometimes known) in November’s Budget has raised numerous questions across the financial services industry – and employers with these schemes, or who are considering them.
For now, employers can carry on with business as usual. Salary exchange arrangements remain fully valid; there is no change until April 2029 and there will, no doubt, be much-needed interim guidance along the way.
What we know about the proposed changes
The government has said it intends to introduce the £2,000 cap on National Insurance (NICs) savings available through salary exchange. The cap applies to both employer National Insurance contributions at 15%, and employee National Insurance contributions at 8% for basic rate taxpayers, and 2% for higher-rate taxpayers.
Crucially there is no fine detail yet on how this will be administered, and there will be a consultation which will help work through the mechanics of how this will work in practice.
Providers like us will work with HMRC, the regulator, payroll providers and employers to help play our part in shaping a workable and practical solution. This has been the case with previous reforms, where the policy intent has come early and the operational detail has followed later after consultation.
What is clear though is that this is a cap on NIC savings resulting from salary exchange not a cap on how much can be paid via salary exchange. It’s a cap – not a cancellation.
What should employers do now?
1 Continue their current salary exchange process: there’s no requirement to amend contribution structures, communication materials or payroll rules.
2 Avoid pre-emptive changes until we have a consultation response or later draft legislation.
3 Stay close to their payroll provider. They will ultimately need to build the calculations and administrative mechanism for salary exchange from April 2029.
4 Reassure employees nothing is changing until April 2029. The benefits of salary exchange (and any bonus exchange) remain.
There have been plenty of headlines and noise around this proposed change – a lot of it confusing or wrong.
There are suggestions, too, that some people are confusing this with the tax-free cash allowance, which wasn’t changed in any way despite rumours in the weeks running up to Budget day. All that speculation hasn’t been helpful.
There’s a crucial role for employers and advisers to interpret the planned changes and provide clarity, practical guidance and support with communications for employees when the time is right.
Salary exchange remains a valuable and efficient mechanism to help employees save for their retirement.
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