As rumours circulate ahead of the upcoming Autumn Budget, one of the most significant potential changes for employers centres around salary sacrifice arrangements.
The suggestion is that the Chancellor may limit the amount that an employee can sacrifice from their gross salary to £2,000, after which there would be no Employer or Employee National Insurance (NI) savings.
While it’s important to remember that this is only a rumour, the implications of this potential policy shift could be substantial. Salary sacrifice has long been an integral part of many employers’ benefits strategies, and a £2,000 tax-free cap could represent a significant departure from this.
Below, we will explore the potential impact that this rumoured change could have on UK employers.
Reduced savings on Employer National Insurance
Under current legislation, salary sacrifice offers a significant saving on Employer NI payments.
Salary sacrifice reduces an employee’s gross pay, which in turn lowers the amount of Employer National Insurance due. Because Employer NI is calculated as a percentage of gross salary, a lower salary figure results in immediate NI savings for the employer.
For example:
The current rate of Employers NI is 15% on earnings above £5,000.
Paying an employee £40,000 per year results in an annual NI payment of £5,250 (15% of the £35,000 above the £5,000 threshold) assuming the Employment Allowance cannot be utilised.
Should an employee choose to sacrifice £5,000 of their salary into their pension, their gross income becomes £35,000. This means that the Employers NI amount reduces from £5,250 to £4,500 for the year – a saving of £750.
The change:
Placing a £2,000 cap on salary sacrifice means that Employers NI would have to be paid at the standard rate on any amount sacrificed above this.
Using the above example, should an employee sacrifice £5,000 per year, Employers NI would be due at 15% on the £3,000 exceeding the £2,000 threshold. This would result in an additional Employers NI payment of £450, reducing the saving from £750 to £300.
Potential need to restructure Employee Benefit Schemes
It is important to remember that salary sacrifice is not limited to pensions, but also impacts the following, although the budget changes being talked about seem to be mostly aimed at pensions:
- Cycle-to-work schemes.
- Electric vehicle leasing.
- Childcare benefits.
- Holiday purchase schemes.
- Technology or wellbeing benefits.
A cap on salary sacrifice would likely force employers to reconsider how they structure and promote their benefits. Those choosing to continue offering these benefits would have to absorb the additional NI costs, with the alternative option being to scale back perks and benefits.
Increased payroll and compliance complexities
Implementing a cap would likely create additional administrative strain on businesses as additional compliance obligations would need to be considered. Employers would need to introduce new systems and control measures to ensure that:
- Each employee’s salary sacrifice does not exceed the £2,000 limit.
- Employers NI is correctly calculated on any excess amount.
- Real-time reporting remaining accurate.
- Documentation is updated to reflect any change in rules.
There would also likely be a requirement to train payroll teams on new rules and obligations, and for large organisation with large workforces the administrative impact could be significant.
Increased wage pressures
With rising wage expectations, increases to the National Minimum Wage and broader cost pressures from increasing overheads and supplier charges, many employers are already facing stretched payroll budgets.
A cap on salary sacrifice, and the resulting reduction in Employers NI savings, would likely exacerbate these cost issues rather than offering businesses much needed financial assistance.
To conclude
As we have explored above, the rumoured £2,000 salary sacrifice cap would have significant impact, both financially and administratively, on businesses across the UK. Increased NI liabilities would likely lead to financial strain, reduced employee benefits would likely result in lower staff morale, and increased administrative and training requirements may lead to resources becoming increasingly stretched.
It is important to remember that this proposal remains speculative, and salary sacrifice rules remain unchanged, for the time being at least.
However, in preparation for the Budget, employers may wish to:
- Review their current salary sacrifice arrangements.
- Assess which benefit schemes would likely be most affected.
- Model potential increases to Employer NI costs to gain a fuller understanding of how any potential changes would impact finances and operations.
