The Office for Budgetary Responsibility (OBR) has warned of the “highly uncertain” reaction to salary sacrifice reforms from both employers and pension savers.
The OBR has issued a report on the predicted impact of the changes to pension salary sacrifice proposed by the Chancellor in the Autumn 2025 Budget.
From April 2029 salary-sacrificed pension contributions above an annual £2,000 threshold will no longer be exempt from National Insurance contributions(NICs).
This means that salary-sacrificed pension contributions above £2,000 will be treated as ordinary employee pension contributions in the tax system and therefore be subject to both employer and employee NICs.
Ordinary employer pension contributions will remain exempt from NICs.
The OBR’s modelling demonstrates the behavioural uncertainty that remains around the salary sacrifice reforms.
It warns that whatever measures may be taken, the change is likely to come at a cost to employers.
It predicts that many employers may chose to switch to ordinary contributions, either formalise salary sacrifice arrangements to replicate the tax benefits of salary-sacrifice by increasing contributions in place of wage growth or lowering contractual salary in exchange for higher employer contributions.
Other behaviours predicted by the OBR include a reduction in contributions by individuals in defined contribution schemes, forestalling, increased contributions to meet auto-enrolment minimums, intertemporal smoothing, and a small attrition adjustment.
Damon Hopkins, head of DC workplace savings at consultancy Broadstone, said:
“Employers have a range of options available to them to mitigate the impact but these won’t come without other consequences.
“It is clear that the changes will impact many businesses, some significantly. So, assessing the impact now and considering options which help manage costs while still offering a competitive pension benefit to their employees should be an immediate priority.
“And, like the increase to employer National Insurance, the increased cost to employers from this measure will likely fall to workers in some form, such as less generous workplace pension contributions, lower future pay rises or less jobs.’’