- NICs to apply on pension salary sacrifice above £2,000 from 2029/30.
- Policy expected to raise £4.8bn in its first year.
- Up to 76 per cent of employer costs could be passed to staff.
Forthcoming changes to pension salary sacrifice rules may affect far more workers than ministers have indicated, according to new analysis from the Office for Budget Responsibility.
The independent watchdog examined how employers might respond to the Budget decision to apply National Insurance contributions to employee pension contributions made via salary sacrifice above £2,000 a year from 2029/30. The measure is forecast to raise £4.8bn in that year alone.
Earlier government figures suggested the impact would be limited. Of the 7.7 million employees currently using salary sacrifice for pensions, around 3.3 million contribute more than £2,000 a year. On that basis, ministers argued that roughly 44 per cent would be affected, while 56 per cent — about 4.3 million people — would be protected by the £2,000 threshold.
However, the OBR’s assessment, published February 5 following a request from Steve Webb of Lane Clark & Peacock, suggests the picture could be more complicated.
The ripple effect beyond £2,000
The watchdog outlines three ways in which the changes could spread across a much wider group of employees.
First, employers may rethink salary sacrifice schemes entirely. Some could scale them back or scrap them, increasing pension contributions instead of pay rises or adjusting contractual salaries. The OBR notes that such changes would likely apply across the workforce, meaning even employees contributing less than £2,000 could see lower wage growth in future.
Second, companies may move staff into standard pension arrangements, such as relief at source schemes. In that case, employees would lose the National Insurance savings currently available under salary sacrifice. Higher-rate taxpayers would also need to reclaim additional tax relief themselves, adding another layer of administration.
Third, the OBR assumes a significant share of the extra employer cost will be passed on to workers. It estimates that around 76 per cent of the employer impact could be transferred, mainly through lower wages. That would again mean employees below the £2,000 threshold could feel the effect indirectly.
In short, while the threshold appears to shield millions on paper, employer behaviour may determine who ultimately bears the cost.
Calls for clarity
Steve Webb, partner at Lane Clark & Peacock, reportedly said the change was a major shift that would prompt employers to rethink their pay and pension strategies, as quoted in a news report. He added that the OBR’s findings show there are several ways businesses might respond, potentially affecting workers well beyond those contributing over £2,000.
Webb reportedly said that rather than being fully protected, millions of modest earners could end up losing out, which may weaken incentives to save for retirement. He called for greater clarity from the government on the likely scale of the impact.
The Treasury has maintained that the measure is designed to raise revenue while protecting lower contributors. Yet the OBR’s analysis suggests that once employer decisions come into play, the effects may be less contained than initially presented.
For employees using salary sacrifice, the debate now centres not only on the policy itself, but on how companies choose to react in the years leading up to 2029/30.
