Optimising pension savings for employees

The Autumn Budget gave employers a clear timeline. Until April 2029, National Insurance (NI) savings linked to pension salary sacrifice remain uncapped.

 

This can mean substantial financial savings for businesses, small and large (up to 15% on the value of all employee pension contributions). By way of an example, if a company has 150 employees on a £60k average salary, its NI savings could be in excess of £60k a year. After April 2029, savings will be limited to £300 per employee per year, i.e. £45k a year.

 

This enables an immediate opportunity to boost saving before the Exchequer’s deadline.

 

It also means different things to different employers. Currently, most employers sit in one of three buckets.

 

No salary sacrifice pension scheme in place: These employers don’t have any pension salary sacrifice arrangement at all, but are providing a standard auto-enrolment workplace pension scheme (it’s a legal necessity). They are typically paying a lot more NI than they need to, while their employees’ take-home pay is lower than it could be (the right approach can save them 8% in NI savings). There is understandable confusion between ‘opt-out pension auto-enrolment’ and ‘opt-out pension salary sacrifice’. The first means the employee is opting out of a pension entirely; the latter is about whether to save national insurance in the pension arrangement or stay in a standard pension. Some still don’t know that the efficiency exists, others hesitate over a worry about complexity, compliance or employee understanding. November’s Budget provides a clear message to employers that they can take advantage of these sanctioned tax savings for 3 years uncapped, and then beyond. And when delivered with the right partner, it is easy to do.

 

Those who have adopted a pension salary sacrifice scheme, but inefficiently: The second group of employers is often surprised to discover they sit here. This group has a salary sacrifice pension scheme, but their employees have to ‘opt-in’. This generally means depressed participation (it also creates inconsistency - employees opting in benefit from higher take-home pay, but anyone who doesn’t act has lower take-home pay, despite being on identical salaries and contribution rates). From the employer’s side, only part of the very material NI savings available are realised. November’s Budget adds clarity. There is an opportunity to gain unlimited NI savings for both employers and employees over three years, by switching to an opt-out model, where employees are automatically in the salary sacrifice pension unless they actively choose not to be (or they don’t qualify).

 

Already adopted a full pension salary sacrifice scheme: This group has a fully adopted salary sacrifice pension scheme and will continue as before, making unrestricted NI savings while they can. Employees are included automatically in the salary sacrifice scheme, unless they actively choose otherwise.

 

Inaction by employers brings risk. Payroll costs do not pause, so employers who delay bringing in these pension benefits will continue paying higher National Insurance each and every month, and those costs cannot be reclaimed later. When competitors are making the savings, inflated costs can harm businesses. Decisions made now will influence employment costs well beyond the end of the decade.

 

The wider context makes the issue hard to ignore. Tax and National Insurance thresholds remain frozen while inflation has reshaped household spending. Pay increases are materially less meaningful than they once were, because the Chancellor is taking more of them. Hence pay rises don’t increase take-home pay like they used to, yet everyday costs continue to rise.

 

From the employer’s perspective, compensation has become more expensive while delivering less visible impact. In that environment, pension salary sacrifice is increasingly part of boardroom and HR discussions as a practical route to improve efficiency across payroll, while supporting employees by adding to their take-home pay, without increasing base salaries.

 

HMRC also offers guidance on how to calculate (and set up) tax and NI contributions on salary sacrifice arrangements. And there are pension salary sacrifice calculators too.

 

While the April 2029 deadline is already confirmed, what remains unclear is how many organisations will make changes while the opportunity still exists for them, and their employees.

 

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James Gozney is founder and CEO of Aslan

 

Main image courtesy of iStockPhoto.com and BrianAJackson