The chancellor’s decision to restrict salary sacrifice on contributions of more than £2,000 a year could cost the largest employer £1.5m a year.
This figure is from modelling by Hymans Robertson, looking at the impact on companies that already operate salary sacrifice schemes. Its research says that while the largest corporates will pay the biggest tax bills, the impact will be felt most, in relative terms, by professional services companies, such as lawyers accountants and financial services firms.
Employees at these firms typically have higher salaries so make wider use of such schemes. These can be highly tax-efficient ways of making generous bonus payments, with neither the employer and employee avoiding NI and tax on these payments.
In her Budget speech Rachel Reeves stated that reforms needed to be made as these schemes were not designed to enable tax savings for those in receipt of generous bonuses working in the financial sector.
Hymans Robertson modelled what this £2,000 cap would look for three typically employers and their staff.
It says this could cost medium-sized white-collar firms £830,000 a year – a 1 per cent increase in total employment costs. This assumes a pro professional services company, with 1,000 strong workforce, an average salary of £67,000 a year and strong pension provision.
Meanwhile the cost to a large blue-collar firm might be £1.4m — a 0.3 per cent increase in total employment costs. This assumes a 10,000 manufacturing or energy company with good pensions and an average salary of £43,000.
A large retailer or hospitality firm, with 90,000 staff, modest pensions and a median salary of £33,000 would pay an extra £1.5m under this scheme – just a 0.04 per cent increase.
Hymans says that from an employee perspective, those contributing less than £2,000 annually would see no change in take-home pay. However, employees sacrificing more than £2k would experience reductions, with the impact increasing as contributions rise.
For example, in a large retailer, an employee contributing £6,000 could see take-home pay fall by around £80, while someone contributing £10,000 could lose £160.
Hymans Robertson partner and head of DC corporate consulting Hannah English says: “This is not simply about pension saving; it is about good business practice. Employers whose default contributions are higher, will carry the greatest burden.
“They now face a tough choice: maintain strong pension design and absorb higher costs or reduce their pension contribution and effectively scale back support for long-term retirement adequacy. Meanwhile, businesses that have never invested meaningfully in pensions will feel little impact, leaving them with little incentive to offer a pension to their employees.”
She adds: “If the government’s ambition is to drive productivity and long-term growth, constant tinkering with pension rules creates uncertainty and undermines trust. What savers and employers need is stability and simplicity that will lead to adequacy. This move does not achieve that.”
Hymans adds that this changes — which are not due to be implemented unto 2029 — follow changes earlier this year, which saw NIC rates rise to 15 per cent and thresholds were lowered.
English says: “These same employers saw NI costs increase by approximately £1.2m, £9.9m and £79m respectively. This means the impact of a £2k cap would be similar for medium-sized firms, smaller for large blue-collar employers, and negligible for the largest retailers, but material for those who invest heavily in pensions, compared to the increases they have already been hit by.”
She adds: “The decision will have hard-hitting implications for both employers and employees from 2029. According to our research, fewer than 10 per cent of employers would be able to absorb the cost of a reduction in NI savings on pensions contributions.
“This cost increase is likely to shape businesses’ workplace provision in the future. The cost increase for employers could also see many of them review future pay rises, reduce pensions contribution offerings or adjust future recruitment in order to offset increases in costs. Our research suggests 43 per cent of employers may review their reward strategies as a result of the announcement.
“The changes will also be complex to introduce, and it will be interesting to see how the government plans to monitor them in practice. It’s no surprise that the change will not commence until 2029 – careful consideration will need to be made around the logistics of implementing the cap and providing employers time to set this up.”
