In light of the recent budget announcements, emphasis has been placed on the potential implications for workplace pensions. In the lead-up to the budget, speculation abounded regarding potential changes to pension policy – fortunately these didn’t materialise.
The Government has inherited a complex fiscal scenario, necessitating difficult choices to balance economic growth with revenue generation. Nonetheless, the extent of the contributions expected from pensions was unclear.
Key impact for savers
Despite the widespread speculation, the primary change relates to the treatment of pensions upon death. Currently, pensions left by those aged over 75 are taxed at the beneficiaries’ marginal rate but are typically exempt from inheritance tax. However, beginning in 2027, any unused pensions will be subject to inheritance tax.
The specifics of this policy are currently under consultation, and further details will be available in due course.
Key impact for employers
Of greatest concern for employers is the increase in employer National Insurance contributions starting from April next year. While this change is not directly related to pensions, it does impact overall costs.
However, these can potentially be mitigated through pension contributions made by employees using a salary sacrifice (or salary exchange), arrangement. This mechanism not only reduces costs but can also offer financial benefits to employees.
To clarify, from April next year, the employer National Insurance rate will rise from 13.8% to 15%, and the secondary threshold will decrease from £9,100 to £5,000, leading to increased costs for employers.
Smaller employers eligible for the Employment Allowance will benefit from an increase in the allowance from £5,000 to £10,500. According to the Chancellor, this adjustment implies that nearly 900,000 employers will pay no national insurance contributions, and over 1 million will either pay less or the same as the previous year. Eligibility requires the employer’s Class 1 National Insurance bill for the previous tax year to be less than £100,000, along with compliance with additional rules.
Mitigating cost increases with salary exchange
For other employers, salary exchange can alleviate financial pressure, offering savings and additional income to employees.
For instance, an employee earning £33,000 per year currently incurs an employer National Insurance cost of £3,298 annually. This is set to increase to £4,200 from April, a £902 rise (or 27%). Using salary exchange, the cost for the same employee in 2025 could be reduced to £3,953, saving the company £247 annually. For a business with 50 employees, this translates to a potential saving of nearly £12,500 per year.
In this example, the employee also sees an increase of £132 annually in their take-home pay, a real positive, given cost of living pressures.
From April next year, the national living wage and the national minimum wage will increase to £12.21 and £10 an hour respectively. Importantly, with salary exchange, an employee’s gross earnings cannot fall below these thresholds, precluding those on minimum wage from participating in salary exchange.
In summary…
For those employers not already utilising it, salary exchange represents a clear opportunity for cost savings and additional employee benefits, without impacting pension contributions. This approach provides a straightforward, cost-effective way to achieve financial benefits for both employer and employee.
This summary is based on available information about changes from April 2025 and is intended for illustrative purposes only. It does not constitute financial advice.