Many employers offer salary sacrifice schemes enabling employees to give up some of their salary in exchange for an equivalent employer’s contribution into their pension.
If you sacrifice some of your salary to your pension, the amount you give up is not counted as taxable income so you do not pay tax on it. This can be mutually beneficial for employees and employers due to the national insurance contributions (NICs) and income tax saved.
There is currently no limit on the amount that can be sacrificed and avoid NICs, but income tax relief is subject to an annual allowance of £60,000 (tapered for high earners to a minimum of £10,000) after which contributions are charged at the individual’s highest marginal tax rate.
The Chancellor has announced that from April 2029 annual contributions above £2,000 will attract employer’s NI (currently 15%) and employee’s NI at standard rates (currently 8% or 2% depending on earnings).
Where employers choose to pass on employer’s NI savings by topping up the employee’s pension contributions these arrangements will need to be reviewed. Employers who deal with payroll in-house will need to ensure that their software is updated to apply the new cap accurately across salary sacrifice arrangements.
If you currently choose to sacrifice some of your salary in order to qualify for tax free childcare or child benefit you may be better off continuing to do so, even if it results in higher NICs.
No other changes were announced to the taxation of pensions, including the tax-free lump sum allowance which remains at £268,275.
Speak to an independent financial advisor before making any changes to your pension contributions.
