Salary sacrifice pension changes will cost businesses £2.9bn extra tax

Plans to carve out pensions from salary sacrifice with annual cap will increase tax bills by £2.9bn for employers while employees set to lose £800m a year

UK businesses will have to pay 78% of the extra tax the government expects to raise each year by slashing salary sacrifice pension contributions, shows new data from Bowmore Wealth Group, with an annual bill of £2.9bn as a result of the changes.

The figures are based on a Freedom of Information (FoI) response from the Treasury showing how the expected tax yield is split between employers and employees averaged over tax years 2029-30 and 2030-31.

Individuals are expected to pay 22%, or £800m, of the increased tax bill with businesses footing the majority of the tax burden at £2.9bn.

The measure was first announced at Budget 2025 by former chancellor Rachel Reeves, raising concerns the move would reduce pension contributions once individuals and businesses calculated the tax impact. The original rationale for the change was to reduce the annual cost of £4.7bn to fund the tax relief, which Reeves told MPs was unsustainable.

In her Budget speech last November, Reeves said this was ‘not sustainable for our public finances’, adding the £2,000 cap for contributions above that would mean people saving into salary sacrifice pensions would be ‘taxed in the same way as other pension contributions’.

Reeves said if the situation was not addressed, the costs of this relief were set to increase from £2.8bn in 2016-17 to £8bn by 2030-31, and added the tax break ‘disproportionately benefitted higher earners’. 

From 6 April 2029, pension contributions paid via salary sacrifice will be capped at £2,000 a year. Any contributions above £2,000 will be liable for national insurance contributions (NICs) from both employers and employees.

An estimated 3.3m employees currently use salary sacrifice pensions, and the schemes are offered by nearly 300,000 companies.

It will also have the unintended consequence of hitting corporation tax receipts due to lower profits, with this figure expected to fall by £177m a year, according to the government.

The latest tax grab will hit businesses yet again as they deal with the fallout from the £24bn rise in employer NICs, introduced from April 2025, along with new employment related costs for new enhanced employee rights under the Employment Rights Act 2025, including day one statutory sick pay (SSP) and changes to unfair dismissal.

Gill Millen, managing director at Bowmore Financial Planning, said: ‘This shows how much of an additional burden these salary sacrifice changes are going to heap on employers.

‘Everyone agrees that we aren’t saving enough for our pensions and salary sacrifice was delivering some of that much needed saving. Now that we can see the expected burden on businesses I hope that these proposals get watered down – for example by raising the cap from £2,000 to a much more sensible figure of £10,000 per annum.

‘Until now, there was significant uncertainty on how heavily this measure would impact businesses. We now know for certain that it will cost businesses billions of pounds a year.

‘This effective tax increase is the latest in a series of painful tax hikes. Only last year the main rate of employer NICs went up significantly.

‘It is surprising that the Government took so long to allow this data on the impact on businesses to be published.’

Recent reports from the Pension Commission and Pensions UK show that private sector workers face serious shortfalls in their future pension expectations, largely because they do not save enough for retirement.

‘That is true even for medium or high earners who are going to experience a sharp drop in their living standards when they retire,’ Millen added. ‘They may wish to review their pension strategy and take advantage of salary sacrifice while it’s available.’

Currently, investors can save up to £60,000 tax-free in pensions each year and unused allowances can be carried forward for up to three years. The annual pension allowance starts to reduce once income (excluding pension contributions) goes over £200,000 while carry forward is also capped at what you earn in the current year.

Source - Business & Accountancy Daily

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