The rise in employers national insurance could provide an unexpected boost for the pensions industry, via increased contributions to salary sacrifice schemes.
Many are expecting more employers to offer these schemes, in a bid to reduce higher NI bills, which will increase from 13.8 per cent to 15 per cent in April next year. Employers do not pay NI on these pension payments.
Employees can also benefit from these schemes, as they make tax and NI savings on salary that is redirected into a pension, although it does mean a reduction in take-home pay. As a result they tend to be utilised by those on above-average earnings.
Pension companies say they expect to see more employers offer these schemes. Those that already do may also seek to promote them more effectively, as they have an increased incentive to enrol employees in salary sacrifice schemes.
Standard Life retirement savings director Mike Ambery says: “While the resulting higher staffing costs [from the NI rise] could impact some businesses ability to increase pension contributions, there’s an important potential pensions side effect.
“Workplace pensions could see a boost via an increased incentive to contribute via a salary sacrifice arrangement, where employees agree to reduce their pay in exchange for higher pension contributions. Both employers and employees reduce their NI liability as a result, which will now have a bigger impact for the employer.
“It’s worth noting that not all employers offer salary sacrifice schemes and those on lower incomes are less likely to be enrolled in one – but, taken alongside pre budget speculation, and with no changes to tax relief or tax-free cash, this could be seen as adding to a relatively positive pensions Budget.”
Meanwhile Gary Smith a partner in financial planning at retirement specialists Evelyn Partners described this a potential budget ‘silver lining’ for the pension industry and employees – who could see larger pensions as a result. He says these schemes are particularly beneficial for employees where pay rises push them into the higher or additional rate tax brackets. Chancellor Rachel Reeves confirmed that these thresholds would frozen until 2028.
“Salary sacrifice pension contributions could help some employees avoid big steps in marginal rates of taxation that occur in the UK salary ladder, for instance by avoiding stepping into the 40 per cent higher rate of taxation at £50,270, or the removal of the personal allowance that starts at £100,000 and can result in a 60-62 per cent marginal tax rate.
He explains: “Employers will be looking to reduce costs and as part of this will review their benefit offering to ensure that they are getting value-for-money. Notably, an opportunity may arise for employers to offset some of this cost through the use of a salary sacrifice pension scheme, including bonus sacrifice, where that’s not already in place.”
Salary sacrifice (also known as salary exchange) is a formal arrangement between an employer and an employee whereby an employee gives up part of their salary in exchange for non-cash benefits – which can include waiving some bonus entitlement in favour of a pension contribution. The benefits are not subject to income tax or NICs, so their taxable salary is reduced. Pension contributions via salary sacrifice pensions are a tax-efficient way for employees to pay into a pension scheme and also an attractive option or employers to reduce their NI costs.