Why salary exchange still pays for employers
Salary exchange, or salary sacrifice, will remain a valuable tool for employees and employers even after the planned changes in April 2029. These changes will limit the National Insurance (NI) savings available through salary exchange for pension contributions, rather than placing a cap on salary exchange itself.
This means salary exchange remains a valuable and effective benefit for both employers and employees. And for many employees, the changes will have little to no impact.
What the changes mean for employers
From 6 April 2029, NI savings will only apply to the first £2,000 of salary exchanged for pension contributions. This doesn’t limit how much salary can be exchanged- it simply restricts the NI saving available for both employees and employers to the first £2,000 per employee. You can still use the salary exchange mechanism beyond this threshold. However, if you currently keep any NI savings generated through salary exchange, the introduction of the cap could see employer NI savings reduce from 2029.
On the other hand, if you add these savings into employees’ pension savings, employees will continue to benefit from the arrangement, but only for the first £2,000 exchanged.
Employers may want to ensure they're maximising the benefit from the salary exchange before the cap is introduced, and in the lead up to the April 2029, consider the impact of reduced savings where the employer is retaining their NI savings within the business.
How employees will be affected
From April 2029, some employees exchanging more than £2,000 will see a reduction in NI savings, but those exchanging less than £2,000 won’t be impacted. The average full-time salary in the UK is around £35,000, and the standard employee automatic enrolment contribution of 5% (£1,750) means many employees’ salary exchange amounts will fall well within the new cap.
In fact, the Government’s own figures suggest that seventy-four per cent of basic rate taxpayers will be completely unaffected by the £2,000 cap.
Reducing employees adjusted net income via salary exchange can help them avoid tax traps, keep child benefit, and make the most of pension tax relief, all of which won’t be affected by the cap. Adjusted net income is total taxable income before any personal allowance less certain reliefs, such as pension contributions or gift aid.
Higher earners could still enjoy significant benefits, as salary exchange allows them to receive the full marginal rate of tax relief directly into their pension fund without needing to claim back additional tax relief from HMRC.
Why salary exchange remains valuable
Salary exchange offers more than just NI savings. It can help employees in several ways:
- Helps employees avoid tax traps
- Keep within tax bands
- Remove the need to reclaim tax relief above 20%
While the proposed changes may reduce employer savings where NI savings are currently retained within the business, the continued use of salary exchange after April 2029 can still improve pension outcomes for most employees and support long-term savings goals.
Keep up to date with the changes to salary exchange and if you're not currently using it in your workplace pension scheme, consider implementing it. There are many reasons why it could benefit both you and your employees now and continue to do so after the changes take effect in 2029.
Sources
Annual income – ONS - Average weekly earnings in Great Britain - Office for National Statistics