Ros Altmann is a former Pensions Minister who now sits in the House of Lords.
The salary sacrifice cut announced in the Budget will mean lower take-home pay and pensions for many workers, and higher costs for employers.
It will see both employee and employer National Insurance contributions becoming payable on pension contributions above £2,000 – and it is going to make future pensioners worse off.
The Chancellor has decided to delay introduction of this much-trailed change to April 2029, which is a relief because the administrative burdens on employers, payroll changes and practical implementation issues, as well as extra costs involved, cannot be absorbed or finalised rapidly.
What will the salary sacrifice cut mean for workers?
This change will potentially lead to lower take-home pay for workers.
The earnings level at which the take home pay reductions will impact employees will vary, depending on the level of contributions they and their employer are making to their workplace pension scheme.
Ros Altmann: Employers who cannot afford the additional costs are likely to grant lower pay rises, reduce other staff benefits or hire fewer workers
If employers and individuals are paying, say, 8 per cent of salary – with 5 per cent coming from the employee – into a pension, then the impact of the £2,000 limit will hit take-home pay of those earning over £40,000 a year.
If contribution rates are higher than the minimum, this could kick in at lower levels, so a worker paying in 10 per cent of salary and earning £20,000 a year would also experience reduced take-home pay.
The most likely impact of this reform will be lower employer contributions overall for staff pensions by those employers paying in more than the minimum.
Other employers who cannot afford the additional costs are likely to grant lower pay rises, reduce other staff benefits or hire fewer workers.
What costs will employers face?
The consequences of limiting salary sacrifice to just £2000 a year of pension contributions will mean much higher employment costs for employers.
They will be taxed in the form of National Insurance on pension contributions for their staff contributing over £2,000 a year.
If they are already paying at the minimum legally required level for auto-enrolment, they will be unable to reduce their contributions, so this will just be a net additional cost to the business.
All employers who currently use salary sacrifice will potentially have to meet the costs of staff communications, pension scheme redesign, payroll reconfiguration and possibly need to renegotiate employment contracts for their staff. These are not insignificant costs.
They will particularly hit smaller employers, who will also have to absorb additional costs of the Employment Rights Bill measures.
This is an element which has not been adequately considered yet. Increasing employer costs will hardly be good for growth:
What questions still need to be answered
1. What happens if someone changes jobs during the year – how will the new employer know how much of the £20,000 contribution limit has been used up so far?
2. Who will cover costs of increased queries that are bound to arise as workers try to understand what the change means and what to do about their pension contributions?
3. Do employers need to rewrite their pension scheme rules, booklets, website information, staff portals and so on.
4. Will employers need to renegotiate their employment contracts for staff who agreed to a pay cut to accommodate salary sacrifice which no longer applies?
5. How many employers will just decide to abandon salary sacrifice altogether, on the assumption that a future Government will abolish the National Insurance relief anyway?
That would necessitate further spending to adjust pension communications, scheme design and staff employment contracts, so they might as well just make the change straight away.
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