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Around 3.3 million pension savers are set to be affected by the announced changes to salary sacrifice BudgetHM Revenue and Customs (HMRC) figures show.
Online guidance published by HMRC The changes come as an estimated 7.7 million workers currently use salary sacrifice to make pension contributions.
Of these, 3.3 million forgo more than £2,000 of salary or bonus.
The changes announced in the Budget will mean that salary-sacrificing pension contributions above the annual £2,000 limit will no longer be exempt from National Insurance (NI) from April 2029.
Contributions over £2,000 will be treated as ordinary employee pension contributions in the tax system and will be subject to NI contributions.
employers Workers can be offered salary sacrifice as part of their pension plan as a tax-efficient way to help boost their pots.
The schemes enable people to maintain their take home pay, as people have to pay fewer NI contributions.
The announcement in the Budget has been criticized by pensions industry bodies, who have argued that many people are already facing financially tough times in later life.
Yvonne Braun, Policy Director, Long Term Savings, Health and Safety Association of British Insurers (ABI) previously said, “The extensive work required to rebuild people’s confidence in the stability of pensions will take years”.
People often fluctuate their pension contributions throughout their working lives, depending on factors such as their other financial commitments and outgoings, and how close they are to retirement.
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HMRC guidance states that employees making salary sacrifice contributions are assumed to be of normal working age.
It added: “In particular, people aged 31 to 50 (52%) are estimated to be over-represented compared to their prevalence in the employee population in general (44%).
“Men are estimated to be over-represented in the population making salary sacrifice pension contributions (59%) compared with their prevalence in the UK adult population (50%).
The document also said: “This measure is expected to have an impact on 290,000 employers who operate salary sacrifice arrangements for pension contributions, who will now be required to account for the relevant pension contribution amounts and, where appropriate, report and pay Class A National Insurance contributions on these.
“One-off costs will include familiarization with the changes, training of staff and updating the software. Ongoing costs will include carrying out more calculations and recording and providing additional information to HMRC where salary sacrifice schemes continue to be used.”
Looking at other operational impacts, the document said: “HMRC will need to make IT changes to support the implementation of this measure. The cost of these changes is expected to be in the region of £1.9 million.”
The document also said: “The salary sacrifice for pension contributions remains, and its cost as a relief has increased significantly from £2.8 billion in National Insurance contributions foregone in the tax year 2016 to 2017, rising to £5.8 billion in the tax year 2023 to 2024.
“If no changes are made, this is expected to almost triple to £8bn by tax year 2030 to 2031.”
Sir steve webbThe former pensions minister, now a partner at consultants Lane Clark and Peacock, said the impact on workers could be widespread if employers respond to the changes by making pension provision less generous for all workers.
Sir Steve said: “A budget measure that was largely seen as complex and technical could have significant real-world impacts for millions of workers.
“At a time when there is a significant ‘under-saving’ problem across the country, this change will make matters worse.
“According to the Government’s own estimates, around three in seven workers who use salary sacrifice to pay their pension will be affected by this change, while employers will face a bigger hit due to higher rates of National Insurance contributions.
“While employers have time between now and 2029 to consider their options, there is a risk that some will cut the generosity of their workplace pension offering, which would be a serious backward step.”