Budget 2025: “restricting salary sacrifice will ‘hit both employer budgets and employee take home pay” – Alasdair Mayes, LCP

The OBR announced just ahead of today’s Budget that the National Insurance (NI) savings from pensions salary sacrifice arrangements will be limited to £2,000 of contributions a year. Whilst widely anticipated in the press in the lead up to the Budget, it is disappointing that the Chancellor has chosen to press ahead with this change:

Commenting, Alasdair Mayes, Partner at LCP said: “We expect the cap on salary sacrifice for pensions will kill-off bonus sacrifice for pensions.  Bonuses are normally paid annually but NI applies on a pay period basis. The widely trailed £2,000 annual cap becomes £167 per month for those paid monthly.

“More widely. restricting the benefits of salary sacrifice arrangements will hit both employer budgets and employee take home pay, not long after the increase in employer NI rates announced at last year’s Budget. This is not just a further tax on jobs. It will reduce the level of pensions savings in the UK at a time when many are under-saving for retirement and additional pension saving should be encouraged, not discouraged.  
 
“Allowing the first £2,000 sacrificed to still benefit from the NI savings will limit the impact on ‘ordinary working families’. For example, an individual earning over £40,000 who sacrifices the auto-enrolment minimum 5% of their salary for pensions contributions will exceed the £2,000 cap – meaning many moderate earners will also be caught by this change. For employers communication with impacted employees will be key. The one piece of good news is that implementation has been postponed to April 2029, giving employers and payroll providers time to update systems and restructure their benefit arrangements.”