November’s Budget delivered a mix of long-expected pension reforms and a few unexpected additions. As employers start to digest the detail, it’s becoming clearer how these changes may shape workplace pensions and workforce costs over the coming years.
Salary Sacrifice: Not dead, but certainly wounded
Let’s start with one of the most talked-about changes. Salary sacrifice has long been a go-to tool for reducing employer and employee National Insurance (NI). It is staying, but its impact will be more limited.
A new cap on NIC-exempt salary sacrifice will apply from 6 April 2029, restricting NI savings to the first £2,000 of salary sacrificed each year. That means of course there’s time to prepare, for example readying your payroll provider.
Key points to note:
- Salary sacrifice still exists: employees will continue to enjoy income tax relief, just as for ‘regular’ employee contributions, and you, as an employer, will still make some NIC savings. They’ll just be less than before.
- As the Chancellor noted, many lower-paid workers will be paying in less than £2,000 per year in any case and, for these workers, there will be no change.
- It will of course impact higher earners and mean that you as an employer will save less in NICs than before. You may need to think about redesigning schemes as a result; we’ll see how restrictive the regulations are.
- Employers that relied on substantial NIC efficiencies, particularly for higher earners making large contributions, may need to rethink scheme design.
- Payroll teams will need to update systems to track the new threshold and ensure accurate reporting and pension calculations, but there is plenty of time.
We’ve already started hearing discussions about moving to non-contributory pension arrangements for some higher earners. This is where the employee pays nothing for their pension and the employer pays everything.
For example, a current scheme might be adapted, so that pay is reduced permanently by contract (really permanently, not the ‘permanent’ of salary sacrifice), and the employer makes a larger ongoing contribution to a pension scheme, while the employee pays nothing. This would mean that there would be no ability to change the amount paid, as the employer would have permanently agreed to make an employer contribution and the employee will never have to pay anything to the pension scheme. As employee pay is reduced, then so is their tax. And of course, an employee can’t pay NI on pay they don’t actually receive .
Although less flexible than current salary sacrifice, this ‘permanent reduction’ seems like it could be useful for some staff, especially those who sacrifice more than £2,000. The Treasury however has indicated that it is alive to this possibility , so we’ll have to see what the regulations say as to whether this will be possible, or whether any reduction of current salary to fund a non-contributory pension scheme will be treated in the same way as current salary sacrifice.
These arrangements already exist; In fact, they’re quite common. Presumably however, these long-standing schemes were set up as generous employee benefits, not to avoid salary sacrifice restrictions. Again, we’ll need to see how they are treated, assuming they won’t attract additional NICs. After all, the employee is paying NICs on all of their pay; but presumably, in the past, their pay was worked out (and potentially somewhat reduced) on the basis of the valuable benefit of not having to make their own employee contributions.
Minimum Wage Rise: Direct and Indirect Pension Cost Pressure
Not quite so obvious, this one; but this change will have an effect on some pensions issues.
From April 2026, the National Living Wage (NLW) will rise to £12.80 per hour for workers aged 21 and over.
Why it matters:
- More employees will become eligible for auto-enrolment, increasing member numbers and total employer contributions. The auto-enrolment threshold remains £10,000 per year or the equivalent for a pay period. Anyone on NLW working full or substantially part time will qualify.
- There’s another wrinkle if you use salary sacrifice. Since salary sacrifice cannot reduce pay below the NLW (even if an employee making the same contributions would receive less in their hand), the uplift limits the use of sacrifice for lower-paid staff, potentially increasing employer NIC unless arrangements are redesigned.
Defined Benefit (DB) Surplus Reform
This was pretty much expected, as we’ve discussed before. But if these proposals happen, you may not need to exit or wind up a pension scheme to get hold of surplus.
The Government has confirmed plans to make it easier, though still tightly controlled, for employers to access surpluses in well-funded DB schemes. The reforms will allow:
- A more flexible statutory framework for returning surplus to members or employers, so you can, if you wish, share the spoils
- Trustee-employer agreements to share surpluses under agreed mechanisms
Any access will require clear evidence of long-term sustainability under the new Defined Benefit Funding Code. Funding situations can change, of course, but this may allow you to run on pension schemes, with members in some cases gaining better benefits. This would mean, for the first time, that an ongoing pension scheme can, if the circumstances are right, provide a lump sum to the employer, or even perhaps an income stream.
What should we do?
Although salary sacrifice changes aren’t coming until 2029, it’s worth starting to plan.
You may want to consider, or commission a review from your advisors about, what impact the new £2,000 National Insurance threshold will have on your workforce, and whether there is anything you may wish to do to soften the blow for higher earners.
Check that anyone affected by the increase in the National Living Wage is enrolled into the correct pension scheme if they now qualify, and that any lower earners aren’t affected by the prohibition on sacrificing below the higher NLW.
Consider, if your defined benefit scheme is in surplus, whether you might want to extract some of that surplus, and if so, if you want to share it with staff.
For guidance on any issues relating to workplace pensions, contact our pension lawyers.
