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Employers are facing growing uncertainty over the future of salary sacrifice pension schemes following the Government’s decision to introduce a £2,000 annual cap on National Insurance (NI) relief for pension contributions made through salary sacrifice. Although the cap will not take effect until April 2029, research suggests businesses are already reassessing whether these arrangements remain viable. Why are businesses reassessing their use of salary sacrifice pensions A new study by the Standard Life Centre for the Future of Retirement found that 39 per cent of employers offering salary or bonus sacrifice schemes are now less likely to continue providing them once the cap is introduced. More significantly, 11 per cent have already decided to withdraw their schemes altogether . The proposed cap is expected to affect 3.3 million employees, with more than 300,000 UK companies currently offering salary sacrifice pensions. While pension contributions will remain exempt from Income Tax, any amount sacrificed above £2,000 will be subject to both employee and employer NI Contributions (NICs), increasing payroll costs. Is this change affecting all businesses the same? No. Small and mid-sized employers appear particularly exposed, with almost half ( 49 per cent ) of businesses with 10 - 49 employees saying the cap would make them less likely to offer salary sacrifice schemes in future. Employers who go beyond the minimum auto-enrolment contribution or match higher employee contributions may find the increased NICs difficult to absorb. Illustrative figures from Standard Life show that an employee earning £50,000 and sacrificing £4,000 would incur £160 in extra employee NICs, while the employer NICs would increase by £300 . At higher salary levels, the employer’s exposure rises further. Will all businesses follow suit? While the Treasury estimates the reform will save £4.7 billion annually in tax relief, concerns remain about the broader impact on pension saving. Industry commentators warn that restricting salary sacrifice could undermine efforts to tackle under-saving for retirement, particularly at a time when many employees rely on workplace schemes to build long-term financial security. If you are unsure about which direction to take, there is still time to understand your options. The current deadline in 2029 gives businesses an opportunity to model the financial impact and consider alternative ways to support employee savings while managing their own employment costs. We are still awaiting further information about the implementation of these new reforms, so now is a sensible time for businesses to review their pension arrangements and prepare employees for the changes to come. If you need guidance on your payroll and benefits scheme, please get in touch with our team to help you plan for the upcoming changes.

Employers’ predictions seem to be coming true as National Insurance Contributions (NICs) have skyrocketed to £28 billion, exceeding the Government’s original forecast of £23.9 billion. On 6 April 2025, the employer NIC rate increased from 13.8 per cent to 15 per cent and the threshold for employee earnings that require employer NICs dropped to £5000 a year. Put all these reforms together and employer costs have jumped from £116 billion to £143.9 billion in the last tax year. With Income Tax and NICs making up over half of HMRC’s total tax take, it’s no surprise that employers want to know how to reduce their tax bill. Salary sacrifice Salary sacrifice schemes allow employees to exchange part of their salary for non-cash benefits, such as pensions or private healthcare. This will allow employees to take home more of their salary, as they pay less tax. It also reduces gross salary on which NICs are calculated and lowers NICs for employees and employers. Pensions Pension salary exchanges are one of the most effective ways to lower employer NIC liabilities. Instead of making pension contributions after their earnings are taxed, employees will give up part of their salary for higher employer pension contributions. This salary reduction happens before Income Tax and NICs are calculated and the employee and employer can benefit from reduced NIC liabilities. Dividends Directors might look into paying themselves in dividends to reduce their NIC tax bill and top up their income. Dividends are not subject to NICs, making them a more tax-efficient way to extract income, in comparison to a salary alone. Since April 2026, dividend tax rates have increased by two per cent for both basic and higher rate taxpayers, but they have not lost their tax efficiency, as the tax rates are still lower than those for Income Tax. How can we help? We know increased NIC bills are another thing added to the long list of rising costs and it can be difficult to know how you can manage them all. Our professional team can help review your payroll costs, forecast your NIC liabilities and spot where adjustments like salary sacrifice can bring you some savings. If you need further advice or support with your NIC bill, contact us.