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To no one's great surprise, the Chancellor announced changes as to pension salary sacrifice in her Budget speech. From April 2029 onwards, the amount of salary which can be sacrificed without liability for national insurance contributions (NICs) will be capped at £2,000 per year.
Other pensions changes were announced in or alongside the speech. Most notably, the Government will move to index PPF and FAS compensation for pre-April 1997 pensions.
Salary sacrifice
Salary sacrifice is widely used as a way of reducing NICs. By way of reminder:
- employees pay NICs at 8% on earnings between £12,570 and £50,270, and at 2% on earnings beyond that; and
- employers pay NICs at 15% on earnings beyond £5,000.
As things stand, no NICs are payable on any earnings which are sacrificed for pension purposes. So if an employee earning £50,000 sacrifices £5,000 for pension contributions, there is an NIC saving of £400 for the employee, and £750 for the employer.
Under the Government's proposals, NIC savings will apply only to the first £2,000 of salary which is sacrificed each year. In the example just mentioned, £3,000 of sacrificed salary will be subject to NICs. The increase in NICs, relative to the current position, will be £240 for the employee, and £450 for the employer.
The Government has published guidance about the change. It provides little detail, but states that further guidance will be published "before April 2029".
PPF and FAS compensation
The Government will legislate for indexation of PPF and FAS compensation in respect of pre-April 1997 pensions. Indexation, in line with CPI capped at 2.5% per year, will apply to members whose pre-1997 pensions would have been indexed under their original pension schemes.
The change is expected to take effect from January 2027. Government figures suggest that the overall cost will be about £1.25bn for arrears, and about £60-70m per year going forward.
The Government will presumably foot the bill for the FAS element, as it is responsible for paying FAS compensation. The PPF will meet the cost for PPF compensation from its reserves.
Other changes
Other pension changes announced include the following:
- DB surpluses. The Government will enable DB schemes to pay surplus funds to members above normal minimum pension age as from April 2027, subject to scheme rules. What is contemplated is (presumably) a change to tax legislation such that one-off lump sums will be "authorised payments", albeit only for members who have reached 55 (57 from April 2028). This idea was mooted in the "Options for DB schemes" consultation. Curiously the proposed effective date is earlier than the planned launch date for "employer refund" powers under the Pension Schemes Bill – which is late 2027.
- Death benefits and IHT. There will be further tweaks to the new inheritance tax regime which will apply from April 2027. The Government now proposes that executors or administrators will be able to direct a pension scheme to withhold 50% of taxable death benefits for up to 15 months, and to pay tax due in certain circumstances.
- Collective DC schemes. The Government will give HMRC power to register or de-register unconnected multi-employer CDC schemes. The Government will also create a regulation-making power, so that HMRC "can legislate [for CDC schemes] more efficiently in future". The recent consultation on retirement CDC mentioned that changes to the tax regime will be needed.
Comment
Employers will welcome the long lead-in time before the salary sacrifice change takes effect. In the interim, they may want to consider whether there would be advantages in moving to a non-contributory pension model, at least for high-earners where remuneration packages are individually negotiated.
The Chancellor confirmed that, despite speculation, there would be no change to limits for tax-free lump sums. Likewise the annual allowance was unchanged, and there was no mention of reintroducing a lifetime allowance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
